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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
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FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO. 0-17295
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THE KUSHNER-LOCKE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 95-4079057
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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11601 WILSHIRE BLVD., 21ST FLOOR, LOS ANGELES, CALIFORNIA 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 481-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
13 3/4% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES B DUE 2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value based on the closing price of the Registrant's
Common Stock held by nonaffiliates of the Registrant was approximately
$1,302,000 as of December 18, 2000.
There were 13,846,908 shares of outstanding Common Stock of the Registrant
as of December 18, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A not later than
120 days after the end of the Registrant's fiscal year (September 30, 2000) are
incorporated by reference in Part III Items 10, 11, 12 and 13 of this Form 10-K.
Total number of pages 61. Exhibit Index begins on page 58.
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PART I
ITEM 1. BUSINESS
GENERAL
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company which principally develops, produces, and distributes
original feature films and television programming. The Company's feature films
are developed and produced for the theatrical, made-for-video and pay cable
motion picture markets. The Company's television programming has included
television series, mini-series, movies-for-television, animation, reality and
game show programming for the major networks, cable television, first-run
syndication and international markets.
The Company established its feature film production operations in 1993. In
1994, the Company established an international theatrical film subsidiary to
expand into foreign theatrical distribution. In 1995, in response to the
increased demand for product by the pay-per-view, telephone delivery, pay cable
and basic cable services, the Company formed an entity called KLC/New City
Tele-Ventures to acquire product from third parties for distribution in the
cable, pay service and satellite markets, as well as other emerging markets. The
joint venture has acquired over 100 films for this purpose. The Company owns
82.5% of this entity.
In late 1997, the Company acquired an 80% interest in US SEARCH.com, a
leading provider of fee-based people search and other customized individual
reference services. In June 1999 US SEARCH.com completed an initial pubic
offering in which the Company sold a portion of its shareholdings. As of
September 30, 2000, the Company owned 52.6% of US SEARCH.com. In October 2000
the Company completed a transaction wherein Pequot Capital Management acquired
3,500,000 shares of US SEARCH.com from the Company. The sale was made in
conjunction with a financing transaction where Pequot Private Equity Group, the
venture capital arm of Pequot Capital Management, completed a private financing
with US SEARCH.com for up to $27.5 million. As a result of the transaction, the
Company's ownership position in US SEARCH.com has been reduced below 50%, and
therefore the Company will not be consolidating US SEARCH.com's future operating
results. In the future, the Company will recognize its corresponding share of
equity in US SEARCH.com's earnings and losses, to the extent the Company has
basis remaining in its investment. As of September 30, 2000, the consolidation
of losses in US SEARCH.com had reduced the Company's basis to zero.
In February 1998 the Company established KL/Phoenix, an 80% owned venture,
which distributes film and television product in Latin America. In November
1998, the Company launched Gran Canal Latino ("GCL"), a satellite channel
through a newly-formed 80%-owned subsidiary. GCL broadcasts 24 hours a day, with
a selection of Spanish language films mostly from Spain. GCL's satellite
transmission reaches the United States and all of Latin America including
Mexico. Under a distribution arrangement with Enrique Cerezo, the Company is
broadcasting selections from 1,500 Spanish language movie titles. In April 1999
the Company obtained warrants and a minority ownership interest in The Harvey
Entertainment Company in exchange for 468,886 shares of common stock of the
Company. In June 1999 the Company obtained a 20% ownership interest in Digital
Renaissance, a German digital special effects facility. In February 2000, the
Company obtained a 30% partnership interest in World Wide Multimedia, LLP in
exchange for $2,000,000 and the contribution of certain film rights. In
conjunction with the transaction, the Company obtained a $2,000,000 loan from
Far East National Bank, due in February 2005, with interest payable quarterly.
In October 1999 the Company sold its 50% partnership interest in TV First
to its partner. TV First purchases media time for Christian music infomercials
and commenced retail marketing of compact discs and audio and video cassettes in
fiscal 1999.
The Company's feature films for fiscal 2000 generated $11,220,000 of
revenues. Picking up the Pieces, starring Woody Allen, Sharon Stone and David
Schwimmer, and The St. Francisville Experiment were delivered by the Company in
Fiscal 2000. In addition, the Company has recently completed post production
activities on Harvard Man, starring Sarah Michelle Gellar and has completed
principal photography on Wolfgirl.
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Since its inception in 1983, the Company has produced or distributed over
1,000 hours of original television programming, including various television
series, movies-for-television and mini-series. For fiscal 2000, the Company's
television slate generated $7,963,000 of revenue, principally from network and
international licensing of two feature length television movies: They Nest,
starring Dean Stockwell, John Savage and Thomas Calabro, and Dark Prince: The
True Story of Dracula, starring Rudolf Martin and Jane March. The Company is
currently in post production on the HBO series, Thrills.
Overall, the Company's operating revenues were $59,640,000 for the fiscal
year ended September 30, 2000, an increase of 20% from the $49,890,000
recognized for the fiscal year ended September 30, 1999. This increase is
primarily due to increased revenues from US SEARCH.com.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995 which involve
certain risks and uncertainties which could cause actual results to differ
materially from those discussed herein. Words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," "believes" and words of similar
substance used in connection with any discussion of future operations or
financial performance identify forward-looking statements. In particular,
statements regarding expectations and opportunities, new product development and
the Company's outlook regarding capital resources, performance and growth are
forward-looking statements. These forward-looking statements are just
predictions and involve risks and uncertainties such that actual results may
differ materially from these statements. Such risks and uncertainties include,
but are not limited to, liquidity and financing requirements, variability of
quarterly results and prior losses, increased interest expense, dependence on a
limited number of projects, certain accounting policies including amortization
of film costs, dependence on key personnel, production deficits, television and
theatrical film industries, competition, government regulation, labor relations,
shares available for future sale, and the volatility of public markets. See the
relevant discussions elsewhere herein, and in the Company's periodic reports and
other documents filed with the Securities and Exchange Commission for further
discussions of these and other risks and uncertainties pertaining to the Company
and its business. The Company is under no obligation, and expressly disclaims
any obligation, to update or alter any forward-looking statements, whether as a
result of new information, future events or otherwise. All forward-looking
statements contained herein are qualified in their entirety by the foregoing
cautionary statements.
US SEARCH.COM, INC.
General. US SEARCH.com, Inc. ("US SEARCH.com"), a 52.6% owned subsidiary of
the Company as of September 30, 2000, is a leading provider of fee-based people
search and other customized individual reference services. US SEARCH.com uses a
wide variety of public records and other publicly available information on
individuals. In October, 2000 the Company completed a transaction wherein Pequot
Capital Management acquired 3,500,000 shares of US SEARCH.com from the Company
in conjunction with a financing transaction of US SEARCH.com. As a result of
these transactions, the Company's ownership position in US SEARCH.com has been
reduced below 50%, and therefore the Company will not be consolidating US
SEARCH.com's future operating results.
MOTION PICTURE INDUSTRY OVERVIEW
The business of the motion picture industry may be broadly divided into two
major segments: production, involving the development, financing and making of
motion pictures; and distribution, involving the promotion and exploitation of
completed motion pictures in a variety of media.
Historically, the largest companies, the so-called "Majors" and
"mini-Majors," have dominated the motion picture industry by both producing and
distributing a majority of the motion pictures which generate significant
theatrical box office receipts. Over the past 15 years, however, "Independents"
or smaller film production and distribution companies, such as the Company, have
played an increasing role in the production and distribution of motion pictures
to fill the increasing worldwide demand for filmed entertainment product.
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The Majors (and mini-Majors) include Universal Pictures (a division of
Vivendi Universal), Warner Bros. Pictures (a division of Time Warner),
Metro-Goldwyn-Mayer Inc., Twentieth Century Fox Film Corporation (a division of
News Corporation), Paramount Pictures Corporation (a division of Viacom), Sony
Pictures Entertainment (including Columbia Pictures, TriStar Pictures and
Triumph Releasing; altogether divisions of Sony) and The Walt Disney Company
(Buena Vista Pictures, Touchstone Pictures and Hollywood Pictures). Generally,
the Majors own their own production studios (including lots, sound stages and
post-production facilities), have nationwide or worldwide distribution
organizations, release pictures with direct production costs generally ranging
from $25,000,000 to $75,000,000, and provide a continual source of pictures to
film exhibitors. In addition, some of the Majors have divisions which are
promoted as "independent" distributors of motion pictures. These "independent"
divisions of Majors include Miramax Films (a division of The Walt Disney
Company), Sony Classics (a division of Sony Pictures), Fox Searchlight (a
division of News Corporation), and New Line (a division of Time Warner) and its
Fine Line distribution label. Most of these divisions were formerly
Independents.
In addition to the Majors, the Independents engaged primarily in the
distribution of motion pictures produced by companies other than the Majors
include, among others, Lions Gate and Artisan Entertainment. The Independents
typically do not own production studios or employ as large a development or
production staff as the Majors.
MOTION PICTURE PRODUCTION AND FINANCING
The production of a motion picture requires the financing of the direct
costs and indirect overhead costs of production. Direct production costs include
film studio rental, cinematography, post-production costs and the compensation
of creative and other production personnel. Distribution costs (including costs
of advertising and release prints) are not included in direct production costs.
Majors generally have sufficient cash flow from their motion picture and
related activities, or in some cases, from unrelated businesses (e.g., theme
parks, publishing, electronics, and merchandising) to pay or otherwise provide
for their production costs. Overhead costs are, in substantial part, the
salaries and related costs of the production staff and physical facilities which
Majors maintain on a full-time basis. Majors often enter into contracts with
writers, producers and other creative personnel for multiple projects or for
fixed periods of time.
Independents generally avoid incurring substantial overhead costs by hiring
creative and other production personnel, but retaining the other elements
required for pre-production, principal photography and post-production
activities only on a project-by-project basis. Independents also typically
finance their production activities from various sources, including bank loans,
"pre-sales," equity offerings and joint ventures. Independents generally attempt
to complete their financing of a motion picture production prior to commencement
of principal photography, at which point substantial production costs begin to
be incurred and require payment.
"Pre-sales" are often used by Independents to finance all or a portion of
the direct production costs of a motion picture. Pre-sales consist of fees or
advances paid or guaranteed to the producer by third parties in return for the
right to exhibit the completed motion picture in theaters or to distribute it in
home video, television, international or other ancillary markets. Payment
commitments in a pre-sale are typically subject to delivery and to the approval
of a number of prenegotiated factors, including script, production budget, cast
and director.
Both Majors and Independents often acquire motion pictures for distribution
through an arrangement known as a "negative pickup" under which the Major or
Independent agrees to acquire from another production company some or all rights
to a film upon its completion. The Independent often finances production of the
motion picture pursuant to financing arrangements with banks or other lenders
wherein the lender obtains a security interest in the film and in the
Independent's rights under its distribution arrangement. When the Major or
Independent "picks up" the completed motion picture, it may assume some or all
of the production financing indebtedness incurred by the production company in
connection with the film. In
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addition, the production company is often paid a production fee and is granted a
participation in the profits from distribution of the motion picture.
Both Majors and Independents often grant third-party participations in
connection with the distribution and production of a motion picture.
Participations are contractual rights of actors, directors, screenwriters,
producers, owners of rights and other creative and financial contributors
entitling them to share in revenues or profits (as defined in the respective
agreements) from a particular motion picture. Except for the most sought-after
talent, participations are generally payable only after all distribution and
marketing fees and costs, direct production costs (including overhead) and
financing costs are recouped by the producer in full.
MOTION PICTURE DISTRIBUTION
Distribution of a motion picture involves the domestic and international
licensing of the picture for (i) theatrical exhibition, (ii) home video, (iii)
presentation on television, including pay-per-view, video-on-demand, satellites,
pay cable, network, basic cable and syndication, (iv) non-theatrical exhibition,
which includes airlines, hotels, armed forces facilities and schools and (v)
marketing of the other rights in the picture, which may include books, CD-ROMs,
merchandising and soundtrack recordings.
Theatrical Distribution and Exhibition. Motion pictures are often exhibited
first in theaters open to the public where an admission fee is charged.
Theatrical distribution involves the manufacture of release prints, licensing of
motion pictures to theatrical exhibitors, and promotion of the motion picture
through advertising and promotional campaigns. The size and success of the
promotional and advertising campaign may materially affect the revenues realized
from its theatrical release, generally referred to as "box office gross." Box
office gross represents the total amounts paid by patrons at motion picture
theaters for a particular film, as determined from reports furnished by
exhibitors. The ability to exhibit films during summer and holiday periods,
which are generally considered peak exhibition seasons, may affect the
theatrical success of a film. Competition among distributors to obtain
exhibition dates in theaters during these seasons is significant. In addition,
the costs incurred in connection with the distribution of a motion picture can
vary significantly depending on the number of screens on which the motion
picture is to be exhibited and the ability to exhibit motion pictures during
peak exhibition seasons. Similarly, the ability to exhibit motion pictures in
the most popular theaters in each area can affect theatrical revenues.
Exhibition arrangements with theater operators for the first run of a film
generally provide for the exhibitor to pay the greater of 90% of ticket sales in
excess of fixed amounts relating to the theater's costs of operation and
overhead, or a minimum percentage of ticket sales which varies from 40% to 70%
for the first week of an engagement at a particular theater, decreasing each
subsequent week to 25% to 30% for the final weeks of the engagement. The length
of an engagement depends principally on the audience response to the film.
Films with theatrical releases (which generally may continue for several
months domestically) typically are made available for release in other media as
follows:
<TABLE>
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MONTHS AFTER APPROXIMATE
MARKET THEATRICAL RELEASE RELEASE PERIOD
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Domestic home video............................ 4 - 6 months perpetuity
Domestic pay-per-view.......................... 6 - 9 months 3 months
Domestic pay cable............................. 10 - 18 months 12 - 21 months
Domestic network or basic cable................ 30 - 36 months 18 - 36 months
Domestic syndication........................... 30 - 36 months 3 - 15 years
International theatrical....................... -- 4 - 6 months
International home video....................... 6 - 12 months perpetuity
International television....................... 18 - 24 months 18 months - 10 years
</TABLE>
Home Video. The home video distribution business involves the promotion and
sale of videocassettes, DVDs and videodiscs to video retailers (including video
specialty stores, convenience stores, record stores and other outlets), which
then rent or sell the videocassettes and videodiscs to consumers for private
viewing. The
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domestic home video marketplace now generates total revenues greater than the
domestic theatrical exhibition market.
Videocassettes of feature films are generally sold to domestic wholesalers
on a unit basis. Unit-based sales typically involve the sales of individual
videocassettes to wholesalers or distributors at $20.00 to $60.00 per unit and
generally are rented by consumers for fees ranging from $1.00 to $5.00 per day
(with all rental fees retained by the retailer). Wholesalers who meet certain
sales and performance objectives may earn rebates, return credits and
cooperative advertising allowances. Selected titles including certain
made-for-video programs, are priced significantly lower to encourage direct
purchase by consumers. The market for direct sale to consumers is referred to as
the "priced-for-sale" or "sell-through" market.
Technological developments, including videoserver and compression
technologies which regional telephone companies and others are developing, and
expanding markets for DVD and laser discs, are making competing delivery systems
economically viable and could significantly impact the home video market
generally and, as a consequence, the Company's home video revenues.
Pay-Per-View. Pay-per-view television allows cable and satellite television
subscribers to purchase individual programs, primarily recently released
theatrical motion pictures, sporting events and music concerts, on a "per use"
basis. The fee a subscriber is charged is typically split among the program
distributor, the pay-per-view operator and the cable operator.
Pay Cable. The domestic pay cable industry (as it pertains to motion
pictures) currently consists primarily of HBO/Cinemax, Showtime/The Movie
Channel, Encore/Starz and a number of regional pay services. Pay cable services
are sold to cable system operators for a monthly license fee based on the number
of subscribers receiving the service. These pay programming services are in turn
offered by cable system operators to subscribers for a monthly subscription fee.
The pay television networks generally acquire their film programming by
licensing the distribution rights from motion picture distributors.
Non-Theatrical Markets. In addition to the distribution media described
above, a number of sources of revenue exist for motion picture distribution
through the exploitation of other rights, including the right to distribute
films to airlines, schools, libraries, hotels, armed forces facilities and
hospitals.
International Markets. The worldwide demand for motion pictures has
expanded significantly as evidenced by the development of new international
markets and media. This growth is primarily driven by the overseas privatization
of television stations, introduction of direct broadcast satellite services,
growth of home video and increased cable penetration.
COMPANY MOTION PICTURE ACQUISITIONS
In addition to its own production activities, the Company continually seeks
to acquire rights to films and other programming from Independent film
producers, distribution companies and others in order to increase the number of
films it can distribute in the emerging new delivery systems. To be successful,
the Company must locate and track the development and production of numerous
independent feature films.
Types of Motion Pictures Acquired. The Company generally seeks to produce
or acquire motion pictures across a broad range of genres, including drama,
thriller, comedy, science fiction, family, action and fantasy/adventure, which
will individually appeal to a targeted audience. The Company has been very
selective in acquiring higher budget (over $10,000,000) films because of the
interest that the Majors have shown in acquiring such films, and the associated
competition and higher production advances, minimum guarantees and other costs.
The Company acquires projects when it believes it can limit its financial risk
on such projects through, for example, significant presales, and when it
believes that a project has significant marketability. In most cases, the
Company attempts to acquire rights to motion pictures with a recognizable
marquis "name" personality with public recognition, thereby enhancing promotion
of the motion pictures in the home video or international markets. The Company
believes that this approach increases the likelihood of producing a product
capable of generating positive cash flow, ancillary rights income and the
possibility of a theatrical release.
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Methods of Acquisition. The Company typically acquires films on either a
"pick-up" basis or a "pre-buy" basis. The "pick-up" basis refers to those films
in which the Company acquires distribution rights following completion of most
or all of the production and post-production process. These films are generally
acquired after management of the Company has viewed the film to evaluate its
commercial viability.
The "pre-buy" basis refers to films in which the Company acquires
distribution rights prior to completion of a substantial portion of production
and post-production. Management's willingness to acquire films on a pre-buy
basis is based upon factors generally including the track record and reputation
of the picture's producer, the quality and commercial value of the screenplay,
the "package" elements of the picture, including the director and principal cast
members, the budget of the picture and the genre of the picture. Before making
an offer to acquire rights in a film on a pre-buy basis, the Company may work
with the producer to modify certain of these elements. Once the modifications
are considered acceptable, the Company's obligation to accept delivery and make
payment is conditioned upon receipt of a finished film conforming to the script
reviewed by the Company and other specifications considered important by the
Company.
Acquisition Process. If the Company locates a motion picture project which
it believes satisfies its criteria, the Company may pay an advance or a
guaranteed minimum payment conditioned upon delivery of a completed film
("minimum guarantee") against a share or participation in the revenue actually
received by the Company from the exploitation of a film in each licensed media.
The minimum guarantee is generally paid prior to the film's release. Typically,
the Company will have the right to recoup the minimum guarantee and certain
other amounts from the distribution revenues realized by the Company prior to
paying any additional revenue participation to the production company.
Film Library. The Company's distribution rights for acquired films and
television programs, which may include worldwide, foreign, or domestic rights,
generally range from an initial licensing cycle of seven to 21 years to
perpetuity.
COMPANY FEATURE FILM PRODUCTION
The Company's feature film division was established in 1993 to develop and
produce low and medium budget films. The Company's low to medium budget films to
date have had production budgets ranging from less than $1 million to $10
million, although the Company from time to time may release films having higher
budgets. The Company's low-budget films are primarily targeted for direct
distribution to the television market and its medium-budget films may be
targeted for theatrical release. The Company generally retains distribution
rights for licensing to third parties internationally. The Company's films
generally are distributed by third parties domestically or are limited to
international distribution. In unique circumstances, the Company undertakes
limited domestic distribution or co-distribution activities.
The Company's feature film strategy generally is to develop and produce
feature films when the production budgets for the films are expected to be
substantially covered through a combination of pre-sales, output arrangements,
equity arrangements and production loans with "gap" financing. To further limit
the Company's financing risk or to obtain production loans, the Company often
purchases completion bonds to guarantee the completion of production.
The following films were released or delivered by the Company or its joint
ventures in fiscal 2000:
<TABLE>
<CAPTION>
DELIVERY/
PICTURE INITIAL MEDIA RELEASE DATE PRINCIPAL TALENT
------- ------------- ------------ ----------------
<S> <C> <C> <C>
Picking up the Pieces.................... Theatrical May 2000 Woody Allen,
Sharon Stone
But I'm a Cheerleader.................... Theatrical July 2000 Natasha Lyonne,
Clea DuVall
The St. Francisville Experiment.......... Theatrical July 2000 --
</TABLE>
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The following films are currently scheduled for release or delivery by the
Company in fiscal 2001:
<TABLE>
<CAPTION>
EXPECTED
PICTURE INITIAL MEDIA
------- -------------
<S> <C>
Harvard Man.............................................. Theatrical
Wolfgirl................................................. Theatrical
The Lions are Loose...................................... Theatrical
</TABLE>
There is no assurance that any motion picture which has not yet been
released will be released, that a change in the scheduled release dates of any
such films will not occur or, if such motion picture is released, it will be
successful. The Company has various additional potential feature films under
development. There is no assurance that any project under development will be
produced.
International Distribution
In September 1994 the Company established foreign distribution operations
for its own and third party product. The Company has hired Rob Aft to handle the
Company's international distribution activities as President of International
Distribution. Arturo Feliu handles Latin American distribution activities as
President of KL/Phoenix. See Note 10 of Notes to Consolidated Financial
Statements for information on international revenues.
TELEVISION INDUSTRY OVERVIEW
The United States television market remains the largest in the world,
consisting of the principal broadcast networks and their affiliates, independent
television stations and cable television networks. Expanding international
television broadcast, cable and satellite delivery systems offer further
opportunities for the exploitation of television programming.
Domestic Market. The domestic market for television programming primarily
is composed of four submarkets: the broadcast television networks (ABC, CBS, NBC
and Fox and emerging networks UPN and WBN), pay cable services (such as
HBO/Cinemax, Encore/Starz and Showtime/The Movie Channel), basic cable services
(such as USA Network, the Arts & Entertainment Network, Lifetime, The Family
Channel, The Disney Channel, and Turner Broadcasting Network) and syndicators of
first-run programming (such as Universal, King World Productions and Multimedia,
Inc.).
The domestic broadcast television market currently is dominated by the four
major networks, each of which has approximately 200 affiliated stations. Three
of the four major networks are owned by or affiliated with major motion picture
companies. The affiliates broadcast network-supplied programming and national
commercials in return for payments by the major networks. This relationship
results in the networks being able to reach virtually all of the significant
domestic television markets. There are also a significant number of independent
commercial television stations in the United States. These stations offer an
alternative to network distribution through syndication. The network schedule
provides affiliates with only a portion of their daily program schedule, and the
balance of the time is filled with programs acquired through television
syndication companies or produced locally by the station.
Cable services generally are classified as being in one of four categories:
telephone delivery, superstations, pay cable services (e.g., HBO/Cinemax) and
basic cable networks (advertiser-supported, e.g., The Family Channel). The most
successful cable networks reach more than 60% of the U.S. television households.
Digital compression technology, combined with fiber optics or small-sized
satellite dishes may permit cable companies, telephone companies or direct
broadcast satellite systems to expand the domestic television market up to 500
or more channels.
Television Programming. Each of the four major television networks
currently broadcasts approximately 22 hours of prime-time programming and
approximately 30 hours of daytime programming each week. The increased channel
capacity and large base of cable subscribers that have developed during the
1980s and 1990s have made possible the development of a number of pay cable and
basic cable networks which have become important purchasers of both original and
rerun television programming, including movies-for-television, mini-
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series and series. Suppliers of television programming include the production
division or affiliated companies of the major networks, major film studios
(Majors), station owners and independent producers (Independents) such as the
Company.
International Markets. The number of international outlets for television
programming has been increasing with the worldwide proliferation of broadcast,
cable and satellite delivery systems. Over the last ten years, European
governments have privatized television systems in several countries, including
Germany, Italy, France and Spain. The Company believes privatized systems are
more likely to broadcast American programming than government-owned networks. In
addition, both the number of pay and satellite television systems in Europe and
the number of subscribers to these systems have increased. Pay television and
satellite distribution systems also are developing in other geographic areas,
including many Asian countries. In international markets, suppliers of
programming may be subject to local content and quota requirements which
prohibit or limit the amount of American programming in particular markets. See
"Business -- Government Regulations."
COMPANY TELEVISION STRATEGY
The Company was founded in 1983 to develop and produce, on a cost-effective
basis, quality television programming with broad appeal. The Company's
television business has evolved from the production of programs owned by third
parties and typically airing on local television stations in the first-run
syndication market, such as the long-running daytime series Divorce Court, to
the development, production and ownership of series, movies-for-television and
mini-series for major domestic and international television networks and the
expanding pay and basic cable markets. In 1991, the Company established an
international distribution licensing operation for its own and acquired
television programming. The Company believes that through the control of the
distribution of its own programming this operation has increased the Company's
ability to recover the cost of new programs and to retain the fees and profit
potential previously realized by third parties.
Due to the major networks' ability to produce programming as well as
distribute it, the Company has decreased the amount of programming it provides
to the major U.S. networks. To position itself for the perceived growth in the
overall television market, the Company is actively acquiring various forms of
domestic cable, video-on-demand and satellite rights from third party producers
for license periods ranging from fifteen years to perpetuity through its KLC/New
City joint venture. The customary release cycle includes a period of
approximately six months of pay-per-view followed by 18 to 24 months of pay
cable (HBO, Showtime or USA Network, for example), followed by 24 to 48 months
of basic cable (Romance Channel, Discovery Channel or A&E, for example), and
free television thereafter.
The Company utilizes licensing and co-production arrangements to fund the
costs of production, and generally retains additional licensing rights
including, in the case of series, rerun syndication rights which offer future
upside profit potential. The Company generally does not commence principal
photography of its television programming without first obtaining license or
other revenue commitments or production financing which equal all or a
substantial portion of the budgeted production costs. By obtaining license fees
and other pre-committed revenues through the efforts of its international
television distribution division to cover a substantial portion or all of its
budgeted production costs, the Company believes that it reduces many of the
financial risks associated with an individual production.
TELEVISION PROGRAM FINANCING
Development Costs. The Company generally finances project development costs
without third-party involvement until the script commitment stage. Because of
the likelihood that the significant costs in producing scripts and pilots will
not be recovered, the Company attempts to limit its financial investment by
obtaining financial commitments from networks or other third parties to cover
all or a substantial portion of these costs. See "Business -- Television
Projects in Development."
Program Licensing. Generally, the Company licenses to United States media
the right to broadcast a program for a period ending the earlier of the second
broadcast of the program or four years from delivery in exchange for a license
fee which represents a portion of the program's budgeted production cost. A
production
8
<PAGE> 10
order sets forth the principal terms for a license of the Company's product to a
network and specifies the license fee to be paid and the conditions to be met
for payment. Production orders typically are contingent on the producer's
obtaining certain approvals from the network, including the script, principal
cast and director, prior to commencement of principal photography. The Company
generally retains all other rights to the program and will usually license
certain rights to international broadcasters, enabling the Company to recoup
all, or a portion, of the production costs. In addition, the Company will
typically license additional domestic releases in other media to cover the
remainder, if any, of the production costs. The Company usually receives its
license fee in installments, with one-third due on or prior to commencement of
principal photography, one-third due upon completion of principal photography
and one-third due upon delivery of the completed program. International
distribution typically involves licensing the rights to exhibit programming in
international territories to broadcasters within those territories for a fixed
license fee usually payable after the program has been delivered. Due to timing
differences between the Company's receipt of license fees and its payment of
production costs, the Company generally is required to fund at least a portion
of its production costs from working capital or secured borrowings, even if the
original license fees equal or exceed budgeted production costs.
For first-run syndication programs, license agreements with the first-run
syndicator generally provide the Company a fixed license fee and a percentage of
revenues from distribution after the syndicator recoups the fixed license fee
and its distribution fees and costs.
An alternate first-run syndication revenue source is called "barter" sales.
A television station, in lieu of or in combination with paying licensing fees,
may grant to the Company's distributor the right to sell advertising spots
during the exhibition of the Company's television program. For a program to be
barterable, exhibition of the program on stations reaching at least 70% of the
U.S. television households and in most of the top ten major metropolitan areas
typically is required. The amount of the fee paid by the advertiser is
conditioned upon the program achieving certain agreed upon ratings. If the
specified rating is not achieved, the distributor is required to "make good" by
giving the advertiser additional advertising time or cash payment, and the
Company's share of barter revenues decreases. The Company has licensed its
television series Hammer and Could It Be a Miracle on this basis.
The Company seeks to cover all of its production costs with license fees
and other pre-committed revenues, however it may finance some of the production
costs on its own and may rely on subsequent licensing in international or other
ancillary markets to recoup the remaining production costs. Additional profits
from a television program initially shown on a network or cable service are
realized from subsequent reruns of the program on local television stations,
international delivery systems and cable services after exhibition on a major
network or cable service. In any event, any production is subject to the risk of
cost overruns, and there is no assurance that the Company will be able to
recover any investment it undertakes in a deficit-financed project.
International Co-Productions. The Company has entered into international
co-production arrangements in the past. An international co-production is a
joint venture or partnership between entities in two or more countries which in
certain cases take advantage of alternative sources of financing for its
productions, utilize international tax benefits, pass foreign quota restrictions
and benefit from lower pre-production costs in certain foreign countries. In a
typical co-production arrangement, the Company transfers all or part of its
copyright ownership in the project to third parties (the co-production
entities), which generally provide a portion of the production financing and
other services. Typically, the co-production partners grant distribution rights
to the Company. Receipts from its distribution of the project recoup production
funding, production fees, talent participations, distribution fees and expenses.
Excess receipts, if any, are distributed to the various parties in accordance
with their agreed-upon profit participation. The Adventures of Pinocchio is an
example of a co-production with German, French and English participation, and
Swing was a co-production with English participation.
Producer-for-Hire. In addition to developing and producing its own
programs, the Company on occasion is engaged as a producer-for-hire for a
creative concept or literary property owned by another person. During the late
1980s, as a producer for hire, the Company produced 860 episodes of Divorce
Court, 65 episodes of the
9
<PAGE> 11
Night Games game show, the animated feature film Pound Puppies: The Legend of
Big Paw and the Family Dog episode of Steven Spielberg's Amazing Stories. This
programming is not included in the Company's library. There are at least two
types of producer-for-hire arrangements. Under the first type, the Company
receives a set fee and agrees to deliver the completed program for that fee. The
Company's profit is the excess of its fee over its production costs. If
production costs exceed the package fee, the Company bears the deficit. Under
the second type, the Company furnishes personnel as a producer, receives a fixed
fee per episode and the production costs of the program are reimbursed directly
by the distributor.
Rerun Syndication. Domestic rerun syndication typically involves the
exhibition of programming on local television stations and cable services after
exhibition on a major network. Since production costs for network series may
exceed network license fees and other pre-committed revenues, some television
production companies depend on successful syndication of their programming for
profitable operations. Generally, to be successful in rerun syndication, a
television series must have at least 66 episodes (the equivalent of three full
television seasons).
TELEVISION PRODUCTION ACTIVITIES
As a producer, the Company first develops literary properties internally or
acquires them from third parties. The Company may refine the concept of an
acquired property. It then attempts to interest one of the networks or another
buyer in the project. If the buyer is interested in a concept presented to it,
the buyer will usually order a script from the Company. Once the script is
delivered, the buyer may order production of a single pilot episode or a limited
number of episodes in the case of a series, or the entire production in the case
of a movie-for-television or mini-series.
Once production is ordered, the Company and the buyer negotiate a financing
arrangement. The Company then undertakes pre-production activities in which a
budget is prepared, the screenplay is polished or rewritten, director, actors, a
line producer and technical personnel are engaged, filming is scheduled,
locations are arranged and other steps are taken to prepare the project for
principal photography. By this point, the Company generally has negotiated
license fees and obtained other commitments to cover a substantial portion of
the budgeted production costs. Principal photography is then undertaken,
followed by post-production, in which the film is edited, synchronized with
music and dialogue and, in certain cases, special effects are added. In the case
of a series, if episodes are ordered and the ratings are sufficiently strong,
additional episodes may be ordered for the entire season and then for additional
seasons.
The Company hires writers, directors, cast and crew members on a
project-by-project basis. The terms of employment and compensation are
negotiated in light of an individual's previous experience, the prevailing
market conditions and, where applicable, collective bargaining agreements. The
Company also obtains locations, sets and post-production personnel and
facilities on an as-needed basis. The Company believes that production and
post-production personnel and facilities are in ample supply at competitive
rates.
The production of animated programming is a labor-intensive process that
commences with artistic sketches of the various characters and the story line.
Storyboards, models, songs and voice elements are then sent to various
production companies, typically in Asia, where drawings of the animation frames
are prepared. The frames are painted and then subsequently photographed to
create film. The film is then usually sent back to the United States, where
final editing of footage and mixing of sound effects, dialogue and music is
completed, although on occasion final editing and mixing may be completed in
Asia.
The following table summarizes the Company's television programming for
fiscal 2000, the type of program and the network or other medium where such
programming initially exhibited or will exhibit:
<TABLE>
<CAPTION>
TITLE TYPE OF PROGRAM FIRST EXHIBITION
----- --------------- ----------------
<S> <C> <C>
They Nest....................................... Cable Premiere Cable
Dark Prince: The True Story of Dracula.......... Cable Premiere Cable
</TABLE>
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<PAGE> 12
There is no assurance that any television program which has not yet aired
will be aired, that a change in the scheduled airing date of such programming
will not occur or, if such television program is aired, that it will be
successful.
TELEVISION PROJECTS IN DEVELOPMENT
To develop successful television projects, the Company requires adequate
access to program concepts, ideas and scripts. Such access is dependent upon
numerous factors, including the reputation and credibility of the Company in the
creative community, the relationships the Company has in the entertainment
industry and the Company's financial and other resources. The Company
occasionally enters into agreements with producers and writers to develop or
acquire new programming. While the Company may finance the early development of
such projects, the Company typically does not proceed with the preparation of a
script or the production of a pilot, which involves a more significant financial
commitment, unless a network or other buyer has agreed to fund all or a
substantial portion of the costs associated therewith.
The following table sets forth potential television programming in various
stages of development and the potential network or other medium to which each
may be delivered, if known:
<TABLE>
<CAPTION>
WORKING TITLE TYPE OF PROGRAM
------------- -----------------
<S> <C>
Thrills.......................................... Cable Series (HBO)
</TABLE>
While the Company has many projects in development, as is typical in the
industry, only a relatively small number of such projects are ultimately
produced (with the likelihood of production being more remote in the case of
television series). It is rare for any projects in development to have
production commitments until late in the development process. There is no
assurance that the Company's efforts in developing or acquiring potential new
programs, including any of the projects described above, will lead to production
commitments or that any programs that are ultimately produced will be
successful.
TELEVISION DISTRIBUTION ACTIVITIES
United States Distribution. The Company's original and acquired programming
generally is initially licensed to a network or cable broadcaster for a period
expiring on the earlier of two broadcasts or a period of up to four years from
delivery. Following the expiration of the license, the rights typically revert
to the Company's library and become available for additional licensing. Further
revenues are generally obtained from subsequent licensing in the domestic market
in other media, including syndication, cable and home video.
International Distribution. In 1991, the Company commenced the distribution
of its own television programming and, to a lesser extent, acquired television
programs for distribution in international markets. Programming is distributed
primarily to local international broadcasters and, where available, the home
video market, pay television and cable services. In December 1994, the Company
expanded its activities in international distribution by establishing an
international distribution subsidiary. The Company's combined film and
television distribution division gives the Company increased control over the
marketing of its product line, greater bargaining strength, and improved cost
efficiencies.
The Company's strategy has been to reduce its business risks in
international markets by securing business relationships with strong local
distributors and broadcasters. The Company has entered into output arrangements
in certain foreign territories with broadcasters and distributors who have
agreed to license distribution rights in such markets for all of the Company's
product produced during the specified term of the agreement (generally between
three and five years) at designated prices for various types of film or
television product.
LIBRARY
Since its inception in 1983, the Company has produced or acquired more than
1,000 hours of television programming. The Company's current library includes a
variety of feature films, movies-for-television, television series, game shows
and talk shows produced or acquired by the Company since its inception. A
11
<PAGE> 13
significant portion of the Company's library is under license in many of the
major domestic and international markets. Following the expiration of the
licenses, rights generally revert to the Company for relicensing.
JOINT VENTURES AND ANCILLARY ACTIVITIES
The Company currently holds 50% ownership interests in BLT Ventures, which
produced the two sequels to the animated feature Brave Little Toaster, Cracker
Company LLC, which produced the network television series Cracker, Denial
Venture, which produced the feature Denial, Swing Ventures, which produced the
feature Swing, Trick Productions which produced the feature Freeway II:
Confessions of A Trickbaby, and a 25% interest in Grendel Productions LLC, which
produced the feature Beowulf.
As of September 30, 2000, the Company held a 52.6% ownership interest in US
SEARCH.com, a 22.5% interest in Digital Renaissance, a 30% partnership interest
in World Wide Multimedia, an 82.5% ownership interest in KLC/New City, and an
80% ownership interest in Gran Canal Latino, each as previously described.
COMPETITION
In the film and television program business, the Company competes against
many vertically integrated production and distribution businesses that have
substantially greater resources than the Company, and smaller independent
companies of a similar size to the Company. See "Motion Picture Industry
Overview" above and "Government Regulations" below. Due to the artistic quality
of the product produced, consumer acceptance of individual productions rather
than distributor brand name tend to generate revenues.
BUSINESS CONCENTRATION AND DEPENDENCE
The Company conducts its film and television business world-wide, with no
concentrations in one or a few geographic areas, or to one or a few individual
customers the loss of whom would materially adversely affect Company results.
GOVERNMENT REGULATIONS
The United States Federal Communications Commission ("FCC") repealed its
financial interest and syndication rules in September 1995. Those FCC rules,
which had been adopted in 1970 to limit television network control over
television programming and thereby foster the development of diverse programming
sources, restricted the ability of U.S. television networks ABC, CBS and NBC to
own and syndicate television programming. As a result of the repeal of the FCC's
financial interest and syndication rules, there has been an increase in internal
television network production of programming for their own use. This has placed
additional competitive pressures on program suppliers, such as the Company.
Under the Telecommunications Act of 1996 (the "1996 Act"), manufacturers of
television set equipment are required to equip all new television receivers with
a so-called "V-Chip" which allows for parental blocking of violent,
sexually-explicit or indecent programming based on a rating for any given
program that is broadcast along with the program. The FCC was directed by the
1996 Act to develop a ratings system based upon the recommendations of an
advisory committee selected by the FCC unless the television industry
established its own voluntary ratings system by February 1997. The majority of
the television networks did establish and have implemented such a system. Other
provisions of the 1996 Act revise the broadcast multiple ownership rules, allow
local exchange telephone companies to offer multichannel video programming
service, subject to certain regulatory requirements, and allow for cable
companies to offer local exchange telephone service, subject to certain
regulatory requirements.
The full impact on the Company of the changes brought about by the 1996
Act, including the new content ratings guidelines and accompanying changes in
FCC rules cannot be predicted at the present time. However, it is possible that
recent alliances of certain program producers and television station group
owners may place additional competitive pressures on program suppliers, such as
the Company, to the extent they are unaligned with the major networks or any
television station group owners. These alliances have been further
12
<PAGE> 14
encouraged by FCC rule revisions which permit greater consolidation of ownership
of television stations on the national level by allowing a single television
station licensee to own television stations reaching up to 35% of the nation's
television households and which permit a single owner to own two television
stations in a single market, with certain limitations.
The FCC has also adopted rules that require certain programs to be
broadcast with closed captioning for the hearing impaired and the Company may
have to make additional closed-captioning expenditures to ensure the value of
its library for television licensing. Further, the FCC recently adopted video
description rules to make television more accessible to persons with visual
disabilities. Specifically, the FCC requires certain broadcasters and most
multi-channel video programming distributors to insert into a TV program
narrated descriptions of settings and actions that are not otherwise reflected
in the dialogue. These new rules may result in the Company being required to
further enhance its library with video description for future television
licensing.
Recently enacted legislation requires direct broadcast satellite operators
to carry certain local broadcast channels. Such legislation may limit the number
of pay-per-view and other niche channels available for the Company's programming
on direct broadcast satellite operators' systems. In addition, direct broadcast
satellite operators are required to set aside four percent of their systems'
total channel capacity exclusively for programming of an educational or
informational nature. This requirement may also limit the availability of
channels available for the Company's programming on direct broadcast satellite
systems.
The FCC already requires cable operators to carry certain local analog
stations, and is considering whether to compel cable systems to carry all the
digital signals that a local station broadcasts. Since local stations will be
able to broadcast multiple signals, this may result in decreased availability of
open cable channels for pay-per-view and other niche channels. If this occurs,
the Company may face increased competition for a limited supply of pay-per-view
and other niche channels for distribution.
In international markets, the Company's programming is occasionally subject
to domestic content and quota requirements, and/or other limitations, which
prohibit or limit the amount of programming produced outside of the local
market. Although the Company believes these requirements have not affected the
Company's licensing of its programs in international markets to date, such
restrictions, or new or different restrictions, could have an adverse impact on
the Company's operations.
In connection with certain services provided or intended to be provided by
US SEARCH.com, particularly individual background checks used for certain
purposes, US SEARCH.com may be considered a "consumer reporting agency" as such
term is used in the Fair Credit Reporting Act, as amended ("FCRA"), and,
therefore, may be required to comply with the various consumer credit disclosure
requirements of the FCRA. While US SEARCH.com intends to comply with the FCRA as
a "consumer reporting agency" in connection with providing individual background
checks for employment purposes, the procedures which are implemented by the
Company may be deemed to be insufficient. In addition, US SEARCH.com's limited
procedures to date to avoid being regulated as a consumer reporting agency by
attempting to restrict its individual background check service to permissible
purposes (which do not permit use for employment purposes), may not be
sufficient. Willful or negligent noncompliance with the FCRA, including with
respect to US SEARCH.com's prior operations, could result in civil liability to
the subjects of reports. Also, the Americans with Disabilities Act of 1990
("ADA") contains pre-employment inquiry and confidentiality restrictions
designed to prevent discrimination against individuals with disabilities in the
hiring process. The use by US SEARCH.com's customers of certain information sold
to them is also regulated, both in respect to the type of information and the
timing of its use by the ADA. Similarly, there are a number of states which have
laws similar to the FCRA, and some states which have laws more restrictive than
the ADA. Further, many state laws limit the type of information which can be
made available to the public. In addition, certain state laws may require US
SEARCH.com to be licensed in order to conduct its background check business
within those states. Customers in such states can access US SEARCH.com's Web
site, which may subject US SEARCH.com to the laws of such states. There is no
assurance that US SEARCH.com will not be subject to the laws of states in which
US SEARCH.com has no contacts other than through residents of such state
ordering services through US SEARCH.com's Web site and US SEARCH.com mailing,
faxing or
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<PAGE> 15
e-mailing reports to the resident within such state. In the event US SEARCH.com
is determined to have violated any of the federal or state laws referred to
herein, or other laws and regulations applicable to US SEARCH.com's business,
such as consumer protection laws, US SEARCH.com could be subject to substantial
civil and/or criminal liability which could have a material adverse effect on
the Company's business, financial condition, results of operations and
prospects.
US SEARCH.com is subject to laws and regulations applicable to businesses
generally, and laws or regulations specifically applicable to electronic
commerce. Due to concerns arising in connection with the increasing popularity
and use of the Internet, a number of new or changed laws, governmental policies
and/or regulations may be adopted, or cases may be decided, with respect to the
Internet or commercial online services covering issues such as property
ownership, user privacy, libel, pricing, acceptable content, copyrights,
trademarks and/or other intellectual property rights, taxation, access charges
and other fees, and quality of products and services. These actions, as well as
any increased costs resulting from such actions, could have a material adverse
effect on US SEARCH.com's business, financial condition, results of operations,
and prospects.
US SEARCH.com could also face potential liability from individuals,
government agencies, or businesses under current laws and regulations for
defamation, invasion of privacy negligence, copyright, patent or trademark
infringement, and other claims based on the nature and content of the materials
that appear on US SEARCH.com's website on in its search reports delivered to
customers. In addition, breaches of security on the systems of US SEARCH.com or
its contractors could also expose US SEARCH.com to liability. Imposition of
liability, particularly liability that is not covered by insurance, could have a
material adverse effect on US SEARCH.com's business, financial condition,
results of operation and prospects.
EMPLOYEES
The Company had approximately 55 full-time and 2 part-time employees as of
December 15, 2000. The Company's executive offices are located at 11601 Wilshire
Boulevard, Suite 2100, Los Angeles, California 90025, and its telephone number
is (310) 481-2000.
The Company has employment contracts with certain key executives due to its
reliance upon them for critical functions. The Company relies upon the personal
contacts of its senior officers which have been generated through their prior
business and personal dealings with Majors, other Independents, legal and
accounting firms, business management firms, talent agencies, production lenders
and personal managers who are actively involved in the production community. No
employees of the Company are represented by unions, although staff temporarily
employed for specific film and television program productions are often so
represented. Management believes that employee relations are wholly
satisfactory.
ITEM 2. PROPERTIES
The Company leases approximately 19,000 square feet of office space on the
21st floor at 11601 Wilshire Boulevard, Los Angeles, California under a lease
agreement which runs through June 2005. The minimum annual rent under the lease
currently is $674,000 with a scheduled increase in fiscal 2003.
The Company rents studio facilities as needed for production, except that
certain post-production off-line editing is performed at the Company's executive
offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal proceedings and claims arising out of
the normal course of business. The Company believes that the ultimate resolution
of all of these matters will not have a material adverse effect upon the
Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market ("NNM")
under the symbol "KLOC." Additionally, the stock is listed on the Pacific Stock
Exchange under the symbol "KLO." The following table sets forth the range of
high and low sale prices for the Common Stock, as reported on the NNM, for the
periods indicated:
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
------------ ------ -----
<S> <C> <C>
FISCAL 1999
First Quarter (ended December 31, 1998)..................... $ 8.38 $1.63
Second Quarter (ended March 31, 1999)....................... $16.00 $7.00
Third Quarter (ended June 30, 1999)......................... $21.63 $4.88
Fourth Quarter (ended September 30, 1999)................... $ 8.75 $3.03
FISCAL 2000
First Quarter (ended December 31, 1999)..................... $ 6.94 $3.56
Second Quarter (ended March 31, 2000)....................... $ 7.19 $3.06
Third Quarter (ended June 30, 2000)......................... $ 4.06 $1.59
Fourth Quarter (ended September 30, 2000)................... $ 2.81 $1.00
FISCAL 2001
First Quarter (through December 18, 2000)................... $ 1.13 $0.09
</TABLE>
On December 18, 2000, the last sale price for the Common Stock as reported
on the NNM was $0.09. On November 30, 2000, there were approximately 567 record
holders.
Recent Sales of Unregistered Securities; Uses of Proceeds
None.
Dividends
The Company has never paid any cash dividends and has no present intention
to declare or to pay cash dividends. The payment of dividends also is restricted
by covenants in the Company's credit agreement and the indentures and fiscal
agency agreements under which the Company's Convertible Subordinated Debentures
were issued. It is the present policy of the Company to retain any earnings to
finance the growth and development of the Company's business.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data for the
Company and should be read in conjunction with the detailed consolidated
financial statements included elsewhere in this Annual Report. The selected
consolidated financial data for the fiscal years are derived from the
consolidated financial statements audited by PricewaterhouseCoopers LLP,
independent accountants, whose report with respect to the consolidated balance
sheets of the Company as of September 30, 2000 and 1999 and the related
consolidated statements of operations, cash flows and stockholders' equity for
the years ended September 30, 2000, 1999 and 1998. On October 20, 1998, the
Company changed its independent public accountants.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
2000(1) 1999(1) 1998(1) 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Operating revenues.................. $ 59,640 $ 49,890 $ 76,130 $ 54,746 $ 80,157
Costs relating to operating
revenues.......................... (47,623) (39,666) (61,627) (52,084) (70,648)
Selling, general and administrative
expenses.......................... (50,175) (31,186) (12,028) (4,023) (3,096)
Provision for doubtful accounts..... (6,068) (2,959) (2,118) (1,310) (499)
-------- -------- -------- -------- --------
Earnings (loss) from operations..... (44,226) (23,921) 357 (2,671) 5,914
Equity in earnings (losses) of
unconsolidated entities........... (222) (520) (330) 2,189 --
Loss on impairment of assets........ (3,893) -- -- -- --
Gain (loss) on sale of interest in
subsidiary........................ (91) 13,148 -- -- --
Gain on issuance of stock by
subsidiary........................ -- 21,018 -- -- --
Interest and dividend income........ 1,367 687 79 163 198
Interest expense.................... (8,411) (7,782) (6,261) (4,027) (4,027)
Interest expense related to bridge
note financing.................... -- -- -- -- (943)
-------- -------- -------- -------- --------
Earnings (loss) before minority
interest, income taxes and
extraordinary item................ (55,476) 2,630 (6,155) (4,346) 1,142
Minority interest in subsidiary net
losses............................ 16,222 2,567 -- -- --
-------- -------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary item............ (39,254) 5,197 (6,155) (4,346) 1,142
Income taxes........................ -- (726) (181) (23) (47)
-------- -------- -------- -------- --------
Earnings (loss) before extraordinary
item.............................. (39,254) 4,471 (6,336) (4,369) 1,095
Extraordinary item: costs associated
with repayment of credit
facility.......................... -- -- -- -- (365)
-------- -------- -------- -------- --------
Net earnings (loss)................. (39,254) $ 4,471 $ (6,336) $ (4,369) $ 730
======== ======== ======== ======== ========
Basic earnings (loss) per share(2):
Before extraordinary item......... $ (2.84) $ .38 $ (.69) $ (.49) $ .16
Extraordinary item................ -- -- -- -- (.05)
-------- -------- -------- -------- --------
Net earnings (loss)............... $ (2.84) $ .38 $ (.69) $ (.49) $ .11
======== ======== ======== ======== ========
Diluted earnings (loss) per
share(2):
Before extraordinary item......... $ (2.84) $ .36 $ (.69) $ (.49) $ .16
Extraordinary item................ -- -- -- -- (.05)
-------- -------- -------- -------- --------
Net earnings (loss)............... $ (2.84) $ .36 $ (.69) $ (.49) $ .11
======== ======== ======== ======== ========
Weighted average common shares
outstanding(2).................... 13,839 11,755 9,181 8,959 6,668
======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------
2000(1) 1999(1) 1998(1) 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONDENSED CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents(3)........ $ 14,024 $ 36,434 $ 3,309 $ 16,791 $ 11,636
Accounts receivable, net............ 26,519 30,030 40,418 27,696 22,885
Film and television program costs,
net............................... 80,988 91,499 73,773 68,507 58,463
Investments in unconsolidated
subsidiaries...................... 14,983 12,045 10,798 5,326 1,495
Total assets........................ 151,200 185,115 137,105 124,368 100,152
Notes payable and other
indebtedness...................... 90,055 85,194 84,677 74,278 53,520
Total liabilities................... 120,255 112,790 111,639 93,232 65,902
Stockholders' equity................ 23,035 60,745 25,466 31,136 34,250
</TABLE>
---------------
(1) In November 1997 the Company acquired a controlling interest in US
SEARCH.com. In June 1999 US SEARCH.com completed an initial public offering
in which the Company sold a portion of its shareholdings as well. Because US
SEARCH.com has incurred net losses since acquisition and the Company funded
100% of such losses through its initial public offering, the Company
recognized 100% of those incurred net losses in its consolidated financial
statements through June 1999. Subsequent to the public offering, the Company
has recognized in its consolidated balance sheet a minority interest in the
net equity of US SEARCH.com, and has recognized in its consolidated
statements of operations a minority interest in the net losses of US
SEARCH.com proportionate to the minority ownership. Subsequent to September
30, 2000, the Company reduced its ownership in US SEARCH.com below 50% and
as such will not consolidate earnings in future periods. In April 1999 the
Company acquired a minority interest in The Harvey Entertainment Company.
(2) In September 1997 the Company effected a 1-for-6 reverse stock split.
Amounts for all periods presented herein give retroactive effect to the
reverse split.
(3) $1,958 of cash and cash equivalents are restricted deposits that are
collateral for a sale/leaseback transaction and for certain production loans
for 2000 ($2,088 for 1999, $1,988 for 1998, $1,609 for 1997 and $419 for
1996), $2,200 of cash and cash equivalents are restricted deposits of
subsidiary US SEARCH.com ($2,000 for 1999), and $77 is cash collected by the
Company and reserved for use by Chase Manhattan Bank to pay down outstanding
borrowings under the Company's credit facility ($734 for 1999, $66 for 1998,
$105 for 1997, $4,126 for 1996).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's revenues are derived primarily from the production or the
acquisition of distribution rights in films licensed for release domestically;
from the production and distribution of television programming for the major
domestic television networks, basic and pay cable television and first-run
syndicators; and from the licensing of rights to films and television programs
in international markets. Major domestic television networks are reducing the
volume of independently produced television programming. The Company generally
finances all or a substantial portion of the budgeted production costs of films
and television programming it produces through advances obtained from
distributors and borrowings secured by domestic and international licenses. The
Company typically retains rights to be exploited in future periods or in
additional markets or media. The Company produces a limited number of
higher-budget theatrical films to the extent the Company is able to obtain an
acceptable domestic studio to release the film theatrically in the U.S. In
November 1997, the Company acquired control of US SEARCH.com, Inc., a leading
provider of fee-based people search and other customized individual reference
services. In February 1998 the Company established KL/Phoenix, an 80% owned
venture, which distributes film and television product in Latin America. In
November 1998 the Company established Gran Canal Latino, an 80% owned venture
which broadcasts Spanish and Portuguese language programming in the Americas.
17
<PAGE> 19
The Company's revenues and results of operations are significantly affected
by accounting policies required for the industries in which it operates (see
Note 1 of Notes to Consolidated Financial Statements). Among the more
significant policies are the following:
Film and Television Programs. The Company generally capitalizes the costs
it has incurred to produce a film or television program. These costs include
direct production expenditures, certain exploitation costs, production overhead,
and interest relating to financing the project. Capitalized exploitation or
distribution costs include those costs that clearly benefit future periods such
as film prints and prerelease and early release advertising that is expected to
benefit the film or program in future markets. These costs, as well as third
party participations and talent residuals, are amortized each period on an
individual film or television program basis in the ratio that the current
period's gross revenues for the program bear to management's estimate of
anticipated total remaining gross revenues for such film or program from all
sources. When management reduces its estimates of the future gross revenues for
a particular product, a significant write-down and a corresponding decrease in
the Company's earnings could result. See "Results of Operations" below. Film and
television program costs, net of accumulated amortization, decreased to
$80,988,000 at September 30, 2000 from $91,499,000 at September 30, 1999. Film
and television program costs in process or development at September 30, 2000
decreased to $7,311,000 from $20,472,000 at September 30, 1999. See "Results of
Operations -- Comparison of Fiscal Years Ended September 30, 2000 and 1999"
below.
Gross profits for any period are a function, in part, of the number of
programs delivered in that period and the recognition of costs in that period.
Because initial licensing revenues and related costs generally are recognized
either when the program has been delivered or is available for delivery,
significant fluctuations in revenues and net earnings may occur from period to
period. Thus, a change in the amount of entertainment product available for
delivery from period to period may materially affect a given period's revenues
and results of operations and year-to-year results may not be comparable. The
continuing shift of the Company's film and television program mix during a
fiscal year may further affect the Company's quarter-to-quarter or year-to-year
results of operations as new products may be amortized differently as determined
by length of product life cycle and the number of related revenue sources.
Distributor production advances or license fees received prior to delivery
or completion of a program are deferred. License fees are generally recognized
as revenue on the date the film or program is delivered or available for
delivery. Activities conducted through joint ventures, wherein the Company
reports its equity in earnings (losses) as revenues, can significantly affect
comparability of net earnings. See "Results of Operations" below.
US SEARCH.com. In November 1997, the Company acquired an 80% interest of US
SEARCH.com, a leading provider of fee-based people search and other customized
individual reference services. In June 1999 the Company sold shares of US
SEARCH.com and US SEARCH.com completed an initial public offering which resulted
in the Company's ownership position declining to 55.2%. Subsequent option
exercises by executives of US SEARCH.com have diluted the Company's ownership
percentage to 52.6% as of September 30, 2000. Since its acquisition, US
SEARCH.com's financial position and results of operations have been consolidated
in the Company's financial statements. The consolidation of Search has resulted
in a substantial change in the presentation of the Company's results of
operations due to the inclusion of this new business segment. Since such
acquisition, the Company has consolidated $48,295,000 of revenues and
$30,087,000 of net losses attributable to US SEARCH.com. In October, 2000 the
Company completed a transaction wherein Pequot Capital Management acquired
3,500,000 shares of US SEARCH.com from the Company. The sale was made in
conjunction with a financing transaction where Pequot Private Equity Group, the
venture capital arm of Pequot Capital Management, completed a private financing
with US SEARCH.com for up to $27.5 million. As a result of the transaction, the
Company's ownership position in US SEARCH.com has been reduced below 50%, and
therefore the Company will not be consolidating US SEARCH.com's future operating
results. The Company anticipates recording a gain of approximately $4,800,000 in
the first quarter of fiscal year 2001 associated with the sale of these shares.
In the future, the Company will recognize its corresponding share of equity in
US SEARCH.com's earnings and losses, to the extent the Company has basis
remaining in its investment. As of September 30, 2000, the consolidation of
18
<PAGE> 20
losses in US SEARCH.com had reduced the Company's basis to zero. See Note 10 of
Notes to Consolidated Financial Statements.
Gran Canal Latino. In November 1998, the Company launched Gran Canal Latino
("GCL"), its first satellite channel. GCL broadcasts 24 hours a day, with a
selection of films mostly from Spain. GCL's satellite transmission reaches the
United States and all of Latin America including Mexico. Through November 30,
2000, GCL's cable distributors had addressable homes of approximately 1.5
million subscribers, including 250,000 in the United States. Under a
distribution agreement with Enrique Cerezo, the Company is broadcasting
selections from approximately 1,500 Spanish language movie titles.
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended September 30, 2000 and 1999
The following tables provide the dollar and percentage changes in operating
results by segment and in total for fiscal 2000 versus fiscal 1999:
<TABLE>
<CAPTION>
$000 %
------------------------------- ---------------------------
FILM FILM
AND TV SEARCH CONSOL. AND TV SEARCH CONSOL.
------- -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues........................ $ 818 $ 8,932 $ 9,750 2% 57% 20%
Costs relating to operating revenues...... $(3,072) $ (4,885) $ (7,957) (9)% (76)% (20)%
Gross profit.............................. $(2,254) $ 4,047 $ 1,793 (246)% 43% 18%
Selling, general and administrative
expenses................................ $ (558) $(18,431) $(18,989) (10)% (73)% (61)%
Bad debt expense.......................... $(2,953) $ (157) $ (3,110) (168)% (13)% (105)%
Loss from operations...................... $(5,764) $(14,541) $(20,305) (87)% (84)% (85)%
</TABLE>
The Company's operating revenues for fiscal 2000 increased $9,750,000 (20%)
from fiscal 1999. The increase resulted from a $8,932,000 or 57% increase in
revenues from US SEARCH.com versus 1999 attributable to an increase in the
number of Internet-based transactions which occurred as a result of increased
web site visitor traffic. The growth in web site traffic was primarily driven by
increased advertising on a greater number of Internet search engines and popular
web sites. Additionally, film and television licensing revenues increased
$818,000, or 2%, due primarily to increased film revenues. See Note 10 to the
consolidated financial statements for revenue information by territory and for
significant customers.
The Company recognized $24,679,000 (41%) of revenues during fiscal 2000
from US SEARCH.com. The Company recognized $11,220,000 (19%) of revenues during
fiscal 2000 from the delivery and/or availability of three feature films. The
Company recognized $15,778,000 (27%) of revenues in fiscal 2000 from continuing
licenses of product from the Company's library to domestic cable channel
operators through its majority-owned subsidiary KLC/New City, and through
international sub-distributors including KL/Phoenix. Revenues of $7,963,000
(13%) came from television feature or pilot productions.
In various stages of production for the Company's fiscal 2001 distribution
slate are Harvard Man starring Sarah Michelle Gellar, the feature films Wolfgirl
and The Lions are Loose and the HBO series Thrills.
Costs relating to operating revenues during fiscal 2000 increased
$7,957,000 (20%) as compared to fiscal 1999. As a percentage of operating
revenues, costs relating to operating revenues were 80% for fiscal 2000 in
comparison to 80% for fiscal 1999. Film and television costs increased 9%, due
to an increase in production activity in addition to costs taken from the
reduction of expected future revenues from certain film titles. US SEARCH.com
costs increased 76%, in large part due to costs associated with increased
revenues. Additionally, data acquisition and fulfillment costs increased as a
percentage of revenue from the introduction of lower priced products, combined
with the use of a higher quality data provider for certain products.
Additionally, increased hourly labor costs and higher refund rates contributed
to increased costs related to revenues.
Gross profit during fiscal 2000 increased $1,793,000 (18%) from fiscal
1999. As a percentage of operating revenues, gross profit was 20% for fiscal
2000, compared to the 20% rate for fiscal 1999. Film and television gross profit
amounts decreased by ($2,254,000), principally due to additional amortization
resulting from the
19
<PAGE> 21
reduction of expected future revenues from certain film titles. US SEARCH.com
gross profit amounts increased 43%, resulting from the increase in revenues,
reduced in part by the higher cost of providing services to consumers.
Selling, general and administrative expenses increased $18,989,000 or 61%
for fiscal 2000 from fiscal 1999. The increase in such expenses is principally
due to a $13,700,000 (84%) increase in advertising and marketing expenses for US
SEARCH.com. As a percentage of US SEARCH.com's net revenues, selling, general
and administrative expenses increased to approximately 183% for fiscal 2000,
from approximately 114% for fiscal 1999. This increase is primarily attributable
to an increase in the level of Internet-based advertising, increased television
promotional fee advertisements, a non-cash charge of $2.2 million for warrants
issued in connection with the restructuring of an online advertising agreement,
severance costs and an increase in rent expense. Also included in US
SEARCH.com's 1999 selling, general and administrative expenses is $1,834,000 of
US SEARCH.com non-cash director and officer stock option costs in connection
with options granted in fiscal 1999. Also included in fiscal 1999 expenses are
$1,549,000 of bonuses to the Co-Chairmen and Co-Chief Executive Officers, the
President and Chief Operating Officer, and the Chief Financial Officer. No such
bonuses were included in fiscal 2000 expenses.
Bad debt expense increased $3,110,000 or 105% during fiscal 2000
principally due to a $2,953,000 increase in the provision for doubtful film and
television license receivables based upon estimated collections, in addition to
a $157,000 increase in provisions for doubtful accounts for US SEARCH.com. The
US SEARCH.com increase is primarily due to increases in the accruals for
potential chargebacks regarding uncollectible consumer checks, credit card
charges and 900 number telephone sales.
During fiscal 1999 the Company recognized a $21,018,000 pre-tax gain on the
issuance of stock by its subsidiary, US SEARCH.com. This resulted from the
subsidiary's initial public offering on June 25, 1999, in which new shareholders
invested an amount per share substantially in excess of the Company's per-share
investment in the subsidiary, resulting in a substantial increase in the
subsidiary's net worth. The gain represents the increase in the Company's
revised proportionate share of the subsidiary's net equity. During the quarter
ended September 30, 2000, the Company recorded an impairment provision of
$3,893,000 relating to an investment in equity securities.
During fiscal 1999 the Company recognized a $13,148,000 pre-tax gain on
sale to the public of 1,500,000 shares of its holdings in its subsidiary US
SEARCH.com in conjunction with the initial public offering by the subsidiary. No
comparable transaction occurred in fiscal 2000.
Interest and dividend income increased $680,000 (99%) during fiscal 2000
due to earnings on invested proceeds from the US SEARCH.com initial public
offering and dividends received from the investment in The Harvey Entertainment
Company during fiscal 1999.
Interest expense during fiscal 2000 increased $629,000. The 8% increase was
principally attributable to the increased average levels of borrowing in fiscal
2000 and an increase in the average interest rate. Total indebtedness for
borrowed money increased 6% to $90,054,000 at September 30, 2000 from
$85,194,000 at September 30, 1999.
Loss before income taxes of ($39,254,000) were reported for fiscal 2000,
versus earnings before income taxes of $5,197,000 for fiscal 1999.
The Company's effective income tax rate was 0% for fiscal 2000 compared to
an effective income tax rate of 13% for fiscal 1999. Income tax expense for
fiscal 2000 consisted of alternative minimum taxes and state income taxes.
Through September 30, 2000 the Company and US SEARCH.com had combined estimated
Federal and state net operating loss carryforwards totaling $75,020,000 and
$22,374,000, respectively. The Federal net operating loss carryforwards begin to
expire in fiscal 2008. The state net operating loss carryforwards begin to
expire in fiscal 2004. Due to the sale of US SEARCH.com common stock in
connection with the subsidiary's initial public offering in June 1999, effective
July 1999 US SEARCH.com taxable income or loss will not be consolidated in the
Company's income tax returns. As a result, in future periods taxable income or
loss could vary significantly from financial statement earnings or losses before
income taxes.
20
<PAGE> 22
The Company reported net losses of ($2.84) per basic and diluted share, for
fiscal 2000, compared to earnings of $4,471,000, or $0.38 per basic share and
$0.36 per diluted share, for fiscal 1999. Weighted number of common shares for
the compared year were 13,839,000 (basic and diluted) in fiscal 2000 and
11,755,000 (basic) and 12,696,000 (diluted) in fiscal 1999.
Comparison of Fiscal Years Ended September 30, 1999 and 1998
The following tables provide the dollar and percentage changes in operating
results by segment and in total for fiscal 1999 versus fiscal 1998:
<TABLE>
<CAPTION>
$000 %
-------------------------------- ---------------------------
FILM FILM
AND TV SEARCH CONSOL. AND TV SEARCH CONSOL.
-------- -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues....................... $(34,118) $ 7,878 $(26,240) (50)% 100% (34)%
Costs relating to operating Revenues..... $(24,812) $ 2,851 $(21,961) (43)% 79% (36)%
Gross profit............................. $ (9,306) $ 5,027 $ (4,279) (91)% 118% (30)%
Selling, general and administrative
expenses............................... $ 4,168 $ 14,990 $ 19,158 91% 202% 159%
Provision for doubtful accounts.......... $ 390 $ 451 $ 841 28% 61% 40%
Earnings (loss) from operations.......... $(13,864) $(10,414) $(24,278) NM 268% NM
</TABLE>
---------------
NM -- not meaningful
The Company's operating revenues for fiscal 1999 decreased ($26,240,000)
(34%) from fiscal 1998. The decrease resulted from a ($34,118,000) or (50%)
decline in film and television licensing revenues due primarily to a decline in
the delivery and/or availability of films and television programs. Television
program revenues declined $18,000,000 as episodic deliveries to networks
concluded in fiscal 1998. Also seven larger feature films were delivered during
fiscal 1999 in comparison to 25 moderate-sized feature films delivered or
available in fiscal 1998. Partially offsetting this decrease was a $7,878,000 or
100% increase in revenues from US SEARCH.com versus 1998. This increase was
attributable to increased marketing and advertising expenditures. See Note 10 to
the consolidated financial statements for revenue information by territory and
for significant customers.
The Company recognized $15,747,000 (32%) of revenues during the fiscal 1999
from US SEARCH.com. The Company recognized $14,081,000 (28%) of revenues during
the fiscal 1999 from the delivery and/or availability of seven feature films,
including Ringmaster, starring Jerry Springer which was released in the United
States by Artisan Entertainment, and One Man's Hero starring Tom Berenger, which
was released in the United States by MGM. The Company recognized $11,548,000
(23%) of revenues in fiscal 1999 from continuing licenses of product from the
Company's library to domestic cable channel operators through its majority-owned
subsidiary KLC/New City, and through international sub-distributors including
KL/Phoenix. Revenues of $6,878,000 (14%) came from television feature or pilot
productions. Revenues of $1,135,000 (2%) came from producer fees on third party
productions. Revenues of $1,306,000 (3%) came from deliveries in the Company's
family division of direct-to-video product.
Costs relating to operating revenues during fiscal 1999 decreased
($21,961,000) (36%) as compared to fiscal 1998. As a percentage of operating
revenues, costs relating to operating revenues were 80% for fiscal 1999 in
comparison to the 81% rate for fiscal 1998. Film and television costs declined
43%. This decline was less than the revenue decline principally due to
additional amortization expense resulting from the reduction of estimated future
revenues on several released titles in fiscal 1999. US SEARCH.com costs
increased 79%, which was less than the revenue increase as Internet-sourced
revenues were less costly to provide to consumers.
Gross profit during fiscal 1999 decreased ($4,279,000) (30%) from fiscal
1998. As a percentage of operating revenues, gross profit was 20% for fiscal
1999, slightly more than the 19% rate for fiscal 1998. Film and television gross
profit amounts declined 91%, principally due to reduced operating revenues and
management reducing its estimates of likely future revenues on several released
titles in fiscal 1999.
21
<PAGE> 23
US SEARCH.com gross profit amounts increased 118%, as Internet-sourced revenues
were less costly to provide to consumers.
Selling, general and administrative expenses increased $19,158,000 or 159%
for fiscal 1999 from fiscal 1998. The increase in such expenses is principally
due to a $10,392,000 (200%) increase in US SEARCH.com advertising expenses and a
$3,392,000 (122%) increase in US SEARCH.com administrative expenses. As a
percentage of US SEARCH.com's net revenues, advertising and marketing expenses
increased to approximately 99% for fiscal 1999, from approximately 67% for
fiscal 1998. This increase is primarily attributable to an increase in the level
of Internet-based advertising. As a percentage of net revenues, general and
administrative expenses increased to approximately 64% for fiscal 1999, from
approximately 16% for fiscal 1998. This increase in general and administrative
expenses in absolute dollars is primarily attributable to the cost associated
with the hiring of additional management and administrative personnel in 1999.
Also included in US SEARCH.com's 1999 selling, general and administrative
expenses is $1,834,000 of US SEARCH.com non-cash director and officer stock
option costs in connection with options granted in fiscal 1999. No options were
granted in fiscal 1998. Also included in fiscal 1999 expenses are $1,499,000 of
bonuses to the Co-Chairmen and Co-Chief Executive Officers, the President and
Chief Operating Officer, and the Chief Financial Officer. No such bonuses were
included in fiscal 1998 expenses.
The provisions for doubtful accounts increased $841,000 or 40% during
fiscal 1999 principally due to a $390,000 increase in such provisions for film
and television license receivables based upon estimated collections, and a
$451,000 increase in such provisions for US SEARCH.com. The US SEARCH.com
increase is primarily due to increases in the accruals for potential chargebacks
regarding uncollectible consumer checks, credit card charges and 900 number
telephone sales.
During fiscal 1999 the Company recognized a $21,018,000 pre-tax gain on the
issuance of stock by its subsidiary, US SEARCH.com. This resulted from the
subsidiary's initial public offering on June 25, 1999, in which new shareholders
invested an amount per share substantially in excess of the Company's per-share
investment in the subsidiary, resulting in a substantial increase in the
subsidiary's net worth. The gain represents the increase in the Company's
revised proportionate share of the subsidiary's net equity. No comparable
transaction occurred in fiscal 1998.
During fiscal 1999 the Company recognized a $13,148,000 pre-tax gain on
sale to the public of 1,500,000 shares of its holdings in its subsidiary US
SEARCH.com in conjunction with the initial public offering by the subsidiary. No
comparable transaction occurred in fiscal 1998.
Interest and dividend income increased $608,000 (770%) during fiscal 1999
due to earnings on invested proceeds from the US SEARCH.com initial public
offering and dividends received from the investment in The Harvey Entertainment
Company during fiscal 1999.
Interest expense during fiscal 1999 increased $1,521,000. The 24% increase
was principally attributable to the increased average levels of borrowing in
fiscal 1999 and an increase in the average interest rate. Total indebtedness for
borrowed money increased 1% to $85,194,000 at September 30, 1999 from
$84,677,000 at September 30, 1998.
Earnings before income taxes of $5,197,000 were reported for fiscal 1999,
versus a loss before income taxes of ($6,155,000) for fiscal 1998.
The Company's effective income tax rate was 13% for fiscal 1999 compared to
an effective income tax rate of 3% for fiscal 1998. Income tax expense for
fiscal 1999 consisted of alternative minimum taxes and state income taxes.
Through September 30, 1999 the Company and US SEARCH.com had combined estimated
Federal and state net operating loss carryforwards totaling $35,368,000 and
$9,198,000, respectively. The Federal net operating loss carryforwards begin to
expire in fiscal 2008. The state net operating loss carryforwards begin to
expire in fiscal 2004. Due to the sale of US SEARCH.com common stock in
connection with the subsidiary's initial public offering in June 1999, effective
July 1999 US SEARCH.com taxable income or loss will not be consolidated in the
Company's income tax returns. As a result, in future periods taxable income or
loss could vary significantly from financial statement earnings or losses before
income taxes.
22
<PAGE> 24
The Company reported net earnings of $4,471,000, or $0.38 per basic share
and $0.36 per diluted share, for fiscal 1999 as compared to a net loss of
($6,336,000), or losses of ($0.69) per basic and diluted share, for fiscal 1998.
Weighted number of common shares for the compared year were 11,755,000 (basic)
and 12,696,000 (diluted) in fiscal 1999 and 9,181,000 (basic and diluted) in
fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
On December 8, 2000, the Company filed a borrowing base certificate with
The Chase Manhattan Bank N.A. ("Chase") as agent for the lenders in the
bankgroup (the "lenders") under the Credit, Security, Guaranty and Pledge
Agreement. This certificate reported that the Company is materially over its
borrowing limits which would be an event of default under the Credit Agreement
for which the Agent may terminate the Agreement and/or declare all amounts due
and payable thereunder immediately due and payable, and the Company does not
believe its present cash position would enable it to repay the amounts due.
Consequently, the Company was prohibited from making any payments to any
subordinated creditors under either its 13 3/4% Convertible Subordinated
Debentures or its 8% Convertible Subordinated Debentures, both of which matured
on December 15, 2000. Even if the Company would not be in default under the
Credit Agreement, the Company's present cash position would not enable it to
make the required payments on the principal amounts due upon maturity of these
debentures. Failure to make these payments when due constituted a default of the
Company's obligations under these debentures. The Company is exploring its
options with respect to the debentures. There can be no assurance that the
Company will reach an accommodation with the debenture holders. Additionally,
the Company believes the defaults on the senior credit line and debentures may
materially impact the Company's ability to extend the maturity dates of its
production loans, and may limit the Company's ability to obtain further
production loans.
Management does not expect that existing resources and cash expected to be
generated from operating activities will be sufficient to fund the combined
requirements of the Company's planned production, acquisition and distribution
activities and mandatory interest and debt repayments in the next twelve months.
The Company is in active negotiations with the lenders to reschedule interest
and principal repayments on its existing credit facility and is exploring
strategic alternatives, including possible asset sales and additional licensing
activities with third parties to enhance liquidity. There can be no assurance
that such negotiations will be successful or that asset sales or other
transactions will generate sufficient funds to enable the Company to meet its
obligations as they become due. In the event negotiations with the lenders are
not successful, the Company will not be able to meet operating requirements.
Cash and cash equivalents decreased 62% to $14,024,000 (including
$1,958,000 of restricted cash being used as collateral for film sale/leaseback
transactions, and $2,200,000 of restricted deposits of subsidiary US SEARCH.com,
and $77,000 of reserved cash to be applied against the Company's outstanding
borrowings under its credit facility) at September 30, 2000 from $36,434,000
(including $4,088,000 of restricted cash and $734,000 of reserved cash) at
September 30, 1999 primarily resulting from proceeds obtained from the initial
public offering of US SEARCH.com.
The Company's film and television program operations are capital intensive.
The Company has funded its working capital requirements through receipt of third
party domestic and international licensing payments as well as other operating
revenues, and proceeds from debt and equity financings, and has relied upon its
line of credit and transactional production loans to provide bridge production
financing prior to receipt of license fees. The Company funds production and
acquisition costs out of its working capital, including the line of credit, and
through certain pre-sale of rights in international markets. In addition, the
expansion of the Company's international distribution business and the
establishment of its feature film division have significantly increased the
Company's working capital requirements and use of related production loans.
The Company experienced net negative cash flows of ($29,333,000) from
operating activities primarily resulting from the Company's operating
expenditures exceeding operating receipts at the Company and its subsidiary US
SEARCH.com.
Additionally, the Company had net negative cash flows of ($7,471,000) from
investing activities, primarily from additions of property, plant and equipment
by US SEARCH.com and the investment in World
23
<PAGE> 25
Wide Multimedia, LLP. These negative cash flows were offset in part by net cash
of $14,981,000 provided primarily by financing activities from production loans
and greater usage of the Company's revolving line of credit. Net unrestricted
cash decreased by $21,823,000 to $9,789,000 on September 30, 2000.
Credit Facility
In June 1996, the Company obtained a $40,000,000 syndicated revolving
credit facility with a group of banks, including Comerica Bank -- California
("Comerica") and Far East National Bank ("Far East"), led by The Chase Manhattan
Bank. A September 1997 amendment increased the maximum amount of revolving
credit to $60,000,000, and a December 1998 amendment increased the maximum
amount of revolving credit to $75,000,000, as discussed more fully below. The
agreement, as amended, provides for borrowing by the Company on specified
percentages of receivables and a specified amount of the Company's appraised
library value for unsold or unlicensed rights and is secured by substantially
all of the Company's assets. In August 2000, the Company negotiated the
extension of the credit facility through the period ending September 30, 2001.
This amendment eliminates a production tranche which was granted under a
previous amendment and calls for scheduled paydowns of the credit facility. The
Company pays an annual commitment fee of .5% of the unused portion of the credit
line. As described earlier, on December 8, the Company filed a borrowing base
certificate with The Chase Manhattan Bank as agent under the Credit, Security,
Guaranty and Pledge Agreement. This certificate reported that the Company is
materially over its borrowing limits, which would be an event of default under
the Credit Agreement. As of December 16, 2000, the Company had drawn down
$67,205,000 under the credit facility out of a total net borrowing base
availability of $63,794,000.
The credit agreement contains restrictive covenants to which the Company
must adhere. These covenants include limitations on additional indebtedness,
liens, investments, disposition of assets, guarantees, deficit financing,
capital expenditures, affiliate transactions, the use of proceeds, and prohibit
payment of cash dividends and prepayment of subordinated debt. In addition, the
credit agreement requires the Company to maintain a minimum liquidity level,
limits overhead expense and requires the Company to meet certain ratios. The
credit agreement also contains a provision permitting the bank to declare an
event of default if either of Messrs. Locke or Kushner fails to be the Chief
Executive Officer of the Company or if any person or group acquires ownership or
control of capital stock of the Company having voting power greater than the
voting power at the time controlled by Messrs. Kushner and Locke combined (other
than any institutional investor able to report its holdings on Schedule 13G
which holds no more than 15% of such voting power). For fiscal 1999, the group
waived the Company's noncompliance with the annual overhead covenant.
In December 1998 the banks increased the maximum amount of the Company's
collateralized line of credit from $60,000,000 to $75,000,000. Existing
participants in the syndicate approved the increase and are committed to lend up
to $68,000,000. Additional availability is subject to adding new banks to the
syndicate. As of December 18, 2000, the credit line remained overdrawn.
Proceeds from Sales of Securities
In December 1998 the Company obtained net proceeds of $5,673,000
($6,000,000 of gross proceeds) through a private placement of 1,200,000
newly-issued shares of common stock. In February 1999 the Company filed a
registration statement for such shares.
On April 26, 1999 the Company issued 468,883 shares of restricted common
stock to The Harvey Entertainment Company ("Harvey") in exchange for 55,000
shares of Series A Preferred Stock of Harvey and 388,215 warrants exerciseable
into common stock of Harvey, all pursuant to a stock purchase agreement
involving a new Harvey investor group which includes the Company. The Harvey
Series A Preferred Stock are convertible into 814,814 shares of Harvey common
stock commencing October 26, 1999 and require payment of quarterly dividends in
cash or in additional shares of Harvey Series A Preferred Stock at a 7% annual
rate. The Company holds certain demand and piggyback registration rights
relating to its Harvey securities. On a fully-diluted basis, assuming all
securities exerciseable or convertible into Harvey common stock are so exercised
or converted, the Company would own 12% of the voting shares of Harvey. In June
1999 the Company filed a registration statement for the shares of its restricted
common stock issued to Harvey.
24
<PAGE> 26
Effective May 14, 1999 the Company called for redemption of all of its
Class C Redeemable Common Stock Purchase Warrants (the "Class C Warrants") and
its outstanding 10% Convertible Subordinated Debentures, Series A due 2000. In
advance of the redemption, a total of 794,215 Class C Warrants were exercised
for 794,215 shares of Common Stock and the Company received proceeds of
$5,419,000. In advance of the redemption, the Company issued 6,435 new shares of
common stock for the conversion of $49,000 aggregate principal amount of the
Series A Debentures. The Company redeemed $28,000 aggregate principal amount of
the Series A Debentures.
On June 25, 1999, the Company's subsidiary US SEARCH.com consummated an
initial public offering of newly-issued common stock. The subsidiary sold
4,500,000 newly-issued shares and obtained $36,109,000 of net proceeds. Also on
June 25, 1999 the Company sold 1,500,000 shares out of its holdings of US
SEARCH.com common stock and obtained $12,555,000 of net proceeds. The Company
recognized a $13,148,000 pre-tax gain on the sale of the 1,500,000 shares and a
$21,018,000 gain on the increased value of its proportion of the net equity of
the subsidiary. In October, 2000 the Company completed a transaction wherein
Pequot Capital Management acquired 3,500,000 shares of US SEARCH.com from the
Company. The sale was made in conjunction with a financing transaction where
Pequot Private Equity Group, the venture capital arm of Pequot Capital
Management, completed a private financing with US SEARCH.com for up to $27.5
million. As a result of the transaction, the Company's ownership position in US
SEARCH.com has been reduced below 50%, and therefore the Company will not be
consolidating US SEARCH.com's future operating results. In the future, the
Company will recognize its corresponding share of equity in US SEARCH.com's
earnings and losses, to the extent the Company has basis remaining in its
investment. As of September 30, 2000, the consolidation of losses in US
SEARCH.com had reduced the Company's basis to zero.
Production Loans
The Company's production loans, totaling $15,599,000 as of September 30,
2000, consisted of production loans by Comerica and Far East to consolidated
production entities. The Company provided limited corporate guarantees for
portions of the production loans which are callable in the event that the
respective borrower does not repay the loans by the respective maturity date. In
general these loans are non-recourse to the Company except to the extent of the
guaranties. However, the Company occasionally advances funds to the lenders in
advance of receipts from customers. Deposits paid by the distributing licensees
prior to the delivery of the financed pictures are held as restricted cash
collateral by the Lenders.
The table below shows production loans as of September 30, 2000:
<TABLE>
<CAPTION>
KUSHNER-
ORIGINAL LOCKE
LOAN AMOUNT WEIGHTED CORPORATE PRESENT
FILM OR COMPANY LENDER AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
--------------- -------- ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Susan's Plan.................. Comerica $ 4,625,000 $ 1,354,000 Prime + 1% $ -- 5/31/2001
Ringmaster.................... Comerica 4,200,000 714,000 Prime + 1% 400,000 10/15/2000
Mambo Cafe.................... Far East 1,400,000 223,000 Prime + 1.5% -- 7/31/2001
Picking Up The Pieces......... Comerica 12,000,000 6,955,000 Prime + 1% 700,000 11/15/2000
The Last Producer............. Far East 1,626,000 402,000 Prime + 1% -- 4/30/2001
They Nest..................... Far East 1,500,000 449,000 Prime + 1.5% -- 4/30/2001
Dark Prince................... Far East 1,700,000 1,195,000 Prime + 1% -- 3/31/2001
Harvard Man................... Far East 5,967,000 4,266,000 Prime + 1.5% 400,000 12/15/2001
Conquistador.................. Comerica --(1) 21,000 -- --
TV First...................... Comerica -- 20,000 -- --
----------- ----------- ----------
$33,018,000 $15,599,000 $1,500,000
=========== =========== ==========
</TABLE>
---------------
(1) Assumed from former employee.
In April 1998, a $4,625,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Susan's Plan. The
loan bears interest at Prime (9.50% as of December 15,
25
<PAGE> 27
2000) plus 1% or at LIBOR (6.60% as of December 15, 2000) plus 2%. The loan is
collateralized by the rights, title and assets related to the film. The Company
provided a corporate guaranty in the amount of $600,000 in connection with this
loan. As extended, the loan matures on May 31, 2001.
In August 1998, a $2,900,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Ringmaster. In
November 1998, the loan amount was increased to $4,200,000. The loan bears
interest at Prime (9.50% as of December 15, 2000) plus 1% or at LIBOR (6.60% as
of December 15, 2000) plus 2%. The loan is collateralized by the rights, title
and assets related to the film. The Company provided a corporate guaranty in the
original amount of $800,000 in connection with this loan, which is reducible
based on sales and other loan conditions. As extended, the loan matured on
October 15, 2000. The Company has not repaid the balance of the production loan
and is in discussions with the bank regarding the Company's obligations under
the loan agreement. There can be no assurance that the loan will be extended, or
if it is extended, that such extension will be on favorable terms.
In October 1998, a $1,400,000 production loan was obtained by a
consolidated subsidiary from Far East to cover the production budget of Mambo
Cafe. The loan bears interest at Prime (9.50% as of December 15, 2000) plus
1.5%. The loan is collateralized by the rights, title and assets related to the
film. As extended, the loan matures on July 31, 2001.
In October 1998, a $2,500,000 production loan was obtained by an
unconsolidated subsidiary from Far East National Bank to cover the production
budget of Freeway II: Confessions of a Trickbaby. The loan bears interest at
Prime (9.50% as of December 15, 2000) plus 1.5%. The loan is collateralized by
the rights, title and assets related to the film. The Company provided a
corporate guaranty in the amount of $400,000 in connection with this loan. The
loan has been purchased by Worldwide Multimedia, which has extended the maturity
date to March 31, 2001.
In April 1999, a $12,000,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Picking Up The
Pieces. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1%
or at LIBOR (6.60% as of December 15, 2000) plus 2%. The loan is collateralized
by the rights, title and assets related to the film. The Company provided a
corporate guaranty in the amount of $700,000 in connection with this loan. As
extended, the loan matured on November 15, 2000. The Company has not repaid the
balance of the production loan and is in discussions with the bank regarding the
Company's obligations under the loan agreement. There can be no assurance that
the loan will be extended, or if it is extended, that such extension will be on
favorable terms.
In June 1999, a $1,626,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of The
Last Producer. The loan bears interest at Prime (9.50% as of December 15, 2000)
plus 1%. The loan is collateralized by the rights, title and assets related to
the film. The Company provided no corporate guaranty in connection with this
loan. As extended, the loan matures on April 30, 2001.
In November 1999, a $1,500,000 production loan was obtained by a
consolidated subsidiary from Far East National Bank to cover the production
budget of They Nest. The loan bears interest at Prime (9.50% as of December 15,
2000) plus 1.5%. The loan is collateralized by the rights, title and assets
related to the film. The Company provided no corporate guaranty in connection
with this loan. As extended the loan matures on April 30, 2001.
In February 2000 the Company obtained a $2,000,000 loan from Far East
National Bank. Interest at 7% per year is payable quarterly commencing March
2000. The loan matures in February 2005. Proceeds were used to obtain limited
partnership units in World Wide Multimedia LLP ("WWMM") which collateralize the
loan. The Company has obtained additional limited partnership units in WWMM in
exchange for certain film rights.
In March 2000, a $1,700,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of Dark
Prince: The True Story of Dracula. The loan bears interest at Prime (9.50% as of
December 15, 2000) plus 1%. The loan is collateralized by the rights, title and
assets related to the film. The Company provided a corporate guaranty in the
original amount of $1,250,000 in
26
<PAGE> 28
connection with this loan. The corporate guarantee was reduced to zero by
subsequent licensing of the film. The loan matures on March 31, 2001.
In July 2000, a $5,967,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of Harvard
Man. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1.5%.
The loan is collateralized by the rights, title and assets related to the film.
The Company provided a corporate guaranty in the amount of $400,000 in
connection with this loan. The loan matures on December 15, 2001.
Capital Expenditure Commitments
In its normal course of business as an entertainment distributor, the
Company makes contractual down payments to acquire film and television
distribution rights. This initial advance for rights ranges from 10% to 30% of
the total purchase price. The balance of the payment is generally due upon the
complete delivery by third party producers of acceptable materials, proof of
rights held and insurance policies that may be required for the Company to begin
exploitation of the product. As of September 30, 2000 the Company was not liable
for any amounts under such contracts.
SUMMARY
Management does not expect that existing resources and cash expected to be
generated from operating activities will be sufficient to fund the combined
requirements of the Company's planned production, acquisition and distribution
activities and mandatory interest and debt repayments in the next twelve months.
The Company is in active negotiations with The Chase Manhattan Bank to
reschedule interest and principal repayments on its existing credit facility and
is exploring strategic alternatives, including possible asset sales and
additional licensing activities with third parties to enhance liquidity. There
can be no assurance that such negotiations will be successful or that any
transactions will generate sufficient funds to enable the Company to meet its
obligations as they become due. On December 8, 2000, the Company filed a
borrowing base certificate with The Chase Manhattan Bank as agent under the
Credit, Security, Guaranty and Pledge Agreement which reported that the Company
is materially over its borrowing limits which would be an event of default under
the Credit Agreement for which the Agent may terminate the Agreement and/or
declare all amounts due and payable thereunder immediately due and payable, and
the Company does not believe its present cash position would enable it to repay
the amounts due. Additionally, the Company has not made any payments to any
subordinated creditors under either its 13 3/4% Convertible Subordinated
Debentures or its 8% Convertible Subordinated Debentures, both of which became
due December 15, 2000. Failure to make these payments when due constituted a
default of the Company's obligations under these debentures. In the event Chase
restricts the Company's use of capital, the Company will not be able to meet
operating requirements.
The Company from time to time evaluates strategic alternatives for
enhancing liquidity in its core and non-core businesses. Strategic alternatives
include but are not limited to, the pursuit of opportunities to enhance the
exploitation of the Company's library properties, its distribution system, and
its satellite channel. This approach may include consolidations with,
acquisition of or strategic partnering with companies in our core businesses or
in businesses complementary to our core businesses. In addition to expanding
production and its distribution business, whether internally or by acquisition,
the Company also considers acquisition possibilities from time to time,
including film libraries and companies which may or may not be ancillary to the
Company's existing business, subject to the availability of financing as
necessary. There can be no assurances that any of these transactions will occur.
Many of these alternatives might require a change in the capital structure or
equity or debt financing. There is no assurance that financing sources will be
available or, if available, will be available on commercially acceptable terms.
International operations are a significant portion of total operations.
Therefore the Company is exposed to risks of currency translation losses, cash
collection and repatriation risks and risks of adverse political, regulatory and
economic changes.
The Company's business and operations have not been materially affected by
inflation.
27
<PAGE> 29
Management believes that the Company's film and television sales volumes
are not subject to significant fluctuations based upon seasonality, however
search services have generally declined during holiday periods.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Item 8 are set
forth in the pages indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 20, 1998, the Company changed its independent accountants. This
change (and the response of the Company's former independent public accountants)
is described in the Company's Current Report on Form 8-K filed on October 27,
1998, which is incorporated by reference herein.
28
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information called for in Item 10 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 2000) in the
Company's definitive Proxy Statement in connection with its 2000 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, or in an amendment to this Annual Report of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information called for in Item 11 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 2000) in the
Company's definitive Proxy Statement in connection with its 2001 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, or in an amendment to this Annual Report of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for in Item 12 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 2000) in the
Company's definitive Proxy Statement in connection with its 2000 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, or in an amendment to this Annual Report of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in Item 13 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 2000) in the
Company's definitive Proxy Statement in connection with its 2000 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, or in an amendment to this Annual Report of Form 10-K.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
(a)(1) Financial Statements:
Report of Independent Accountants........................... 30
Consolidated Balance Sheets at September 30, 2000 and
1999.................................................. 31
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999 and 1998..................... 32
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 2000, 1999, and 1998........ 33
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999, and 1998.................... 34
Notes to Consolidated Financial Statements.................. 35
(2) Financial Statement Schedule:
Schedule II for the years ended September 30, 2000, 1999,
and 1998.............................................. 56
All other schedules are inapplicable and, therefore, have
been omitted.
(3) Exhibits
Exhibits filed as part of this report are listed in the
Exhibit Index, which follows the Signatures........... 58
(b) Report on Form 8-K: None
</TABLE>
29
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of The Kushner-Locke Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of The Kushner-Locke Company (the "Company") and its subsidiaries at
September 30, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2000, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein for the years ended September 30, 2000, 1999 and 1998 when
read in conjunction with the related consolidated financial statements. These
financial statements and the financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has an accumulated deficit that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Century City, California
December 15, 2000
30
<PAGE> 32
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 9,789,000 $ 31,612,000
Reserved cash............................................. 77,000 734,000
Restricted cash........................................... 4,158,000 4,088,000
Accounts receivable, net of allowance for doubtful
accounts of $4,446,000 in 2000 and $3,248,000 in
1999................................................... 26,519,000 30,030,000
Due from affiliates....................................... 3,291,000 2,611,000
Film and television program costs, net of accumulated
amortization........................................... 80,988,000 91,499,000
Investments in unconsolidated entities, at equity......... 14,983,000 12,045,000
Other assets.............................................. 11,395,000 12,496,000
------------ ------------
Total assets...................................... $151,200,000 $185,115,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 18,121,000 $ 11,104,000
Due to related party...................................... 87,000 233,000
Notes payable............................................. 87,891,000 82,925,000
Deferred revenue.......................................... 3,361,000 3,628,000
Contractual obligations................................... 7,196,000 11,039,000
Production advances....................................... 1,435,000 1,592,000
Convertible subordinated debentures, net of deferred
issuance costs......................................... 2,164,000 2,269,000
------------ ------------
Total liabilities................................. 120,255,000 112,790,000
Minority interest........................................... 7,910,000 11,580,000
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares:
issued 14,271,908 and outstanding 13,846,908 shares at
September 30, 2000 and 13,810,767 shares at September
30, 1999............................................... 71,923,000 70,379,000
Accumulated deficit....................................... (48,888,000) (9,634,000)
------------ ------------
Net stockholders' equity.......................... 23,035,000 60,745,000
------------ ------------
Total liabilities and stockholders' equity........ $151,200,000 $185,115,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 33
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues:
Film and television program licensing.......... $ 34,961,000 $ 34,143,000 $ 68,261,000
Search and individual reference services....... 24,679,000 15,747,000 7,869,000
------------ ------------ ------------
Total operating revenues............... 59,640,000 49,890,000 76,130,000
------------ ------------ ------------
Costs related to operating revenues:
Film and television program licensing.......... (36,298,000) (33,226,000) (58,038,000)
Search and individual reference services....... (11,325,000) (6,440,000) (3,589,000)
------------ ------------ ------------
Total costs related to operating
revenues............................. (47,623,000) (39,666,000) (61,627,000)
------------ ------------ ------------
Gross profit........................... 12,017,000 10,224,000 14,503,000
Selling, general and administrative expenses..... (50,175,000) (31,186,000) (12,028,000)
Provision for doubtful accounts.................. (6,068,000) (2,959,000) (2,118,000)
------------ ------------ ------------
(Losses) earnings from operations...... (44,226,000) (23,921,000) 357,000
Equity in net (losses) of unconsolidated
entities....................................... (222,000) (520,000) (330,000)
Dividend income.................................. 407,000 167,000 --
Interest income.................................. 960,000 520,000 79,000
Interest expense................................. (8,411,000) (7,782,000) (6,261,000)
(Loss) on impairment of assets................... (3,893,000) -- --
Gain (loss) on sale of interest in subsidiary.... (91,000) 13,148,000 --
Gain on issuance of stock by subsidiary.......... -- 21,018,000 --
------------ ------------ ------------
Earnings (loss) before minority
interest and income taxes............ (55,476,000) 2,630,000 (6,155,000)
Minority interest in subsidiary net losses....... 16,222,000 2,567,000 --
------------ ------------ ------------
Earnings (loss) before income taxes.... (39,254,000) 5,197,000 (6,155,000)
Income tax expense............................... -- (726,000) (181,000)
------------ ------------ ------------
Net earnings (loss).................... $(39,254,000) $ 4,471,000 $ (6,336,000)
============ ============ ============
Basic earnings (loss) per share.................. $ (2.84) $ .38 $ (.69)
============ ============ ============
Diluted earnings (loss) per share................ $ (2.84) $ .36 $ (.69)
============ ============ ============
Weighted average common shares outstanding....... 13,839,000 11,755,000 9,181,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 34
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NET
------------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997... 9,090,080 $38,905,000 $ (7,769,000) $ 31,136,000
Stock options exercised.............. 9,000 34,000 -- 34,000
Conversion of subordinated
debentures......................... 51,282 284,000 -- 284,000
Issuance of stock grants............. 66,667 16,000 -- 16,000
Compensatory warrant grants.......... -- 332,000 -- 332,000
Net loss............................. -- -- (6,336,000) (6,336,000)
---------- ----------- ------------ ------------
Balance at September 30, 1998... 9,217,029 39,571,000 (14,105,000) 25,466,000
Private placement.................... 1,200,000 5,456,000 -- 5,456,000
Investment in The Harvey
Entertainment Company.............. 468,883 5,820,000 -- 5,820,000
Exercises of warrants................ 1,219,361 8,122,000 -- 8,122,000
Stock options exercised.............. 317,309 857,000 -- 857,000
Issuance of stock grants............. 100,000 488,000 -- 488,000
Conversion of subordinated
debentures......................... 1,288,185 9,336,000 -- 9,336,000
Compensatory option and warrant
grants............................. -- 729,000 -- 729,000
Net earnings......................... -- -- 4,471,000 4,471,000
---------- ----------- ------------ ------------
Balance at September 30, 1999... 13,810,767 70,379,000 (9,634,000) 60,745,000
Stock options exercised.............. 8,000 15,000 -- 15,000
Issuance of stock by subsidiary...... -- 630,000 -- 630,000
Conversion of subordinated
debentures......................... 25,641 146,000 -- 146,000
Compensatory option and warrant
grants............................. 2,500 753,000 -- 753,000
Net loss............................. -- -- (39,254,000) (39,254,000)
---------- ----------- ------------ ------------
Balance at September 30, 2000... 13,846,908 $71,923,000 $(48,888,000) $ 23,035,000
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 35
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)...................................... $(39,254,000) $ 4,471,000 $ (6,336,000)
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities:
Minority interest in subsidiary net losses............. (16,222,000) (2,567,000) --
Gain on issuance of stock by subsidiary................ -- (21,018,000) --
Gain on sale of interest in subsidiary................. -- (13,148,000) --
Dividend income........................................ (407,000) (167,000) --
Equity in net losses (earnings) of unconsolidated
entities............................................. 222,000 520,000 330,000
Depreciation and amortization.......................... 469,000 435,000 530,000
Provisions and allowances.............................. 6,068,000 2,959,000 2,118,000
Loss on impairment of asset............................ 3,893,000 -- --
Amortization of capitalized issuance costs............. 46,000 123,000 213,000
Issuance of stock grants............................... -- 488,000 16,000
Compensatory options and warrants...................... 753,000 729,000 332,000
Amortization of film costs............................. 35,103,000 32,354,000 53,916,000
Changes in assets and liabilities:
Reserved cash.......................................... 657,000 (668,000) (379,000)
Restricted cash........................................ (70,000) (2,100,000) 39,000
Accounts receivable.................................... (2,361,000) 7,413,000 (14,755,000)
Due from related party................................. (876,000) 84,000 (1,708,000)
Film and television program cost additions............. (22,092,000) (51,890,000) (59,182,000)
Other assets........................................... 2,134,000 2,704,000 (130,000)
Accounts payable and accrued liabilities............... 7,017,000 5,303,000 1,608,000
Due to related party................................... (146,000) 502,000 --
Deferred revenue....................................... (267,000) (483,000) 749,000
Contractual obligations................................ (3,843,000) (2,812,000) 6,901,000
Production advances.................................... (157,000) (1,377,000) (3,533,000)
------------ ------------ ------------
Net cash used by operating activities............. (29,333,000) (38,145,000) (19,271,000)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of interest in subsidiary, net........ -- 12,555,000 --
Investments in unconsolidated entities................... (3,160,000) (1,767,000) (3,993,000)
Purchases of property and equipment...................... (4,311,000) (610,000) (786,000)
------------ ------------ ------------
Net cash provided (used) by investing
activities...................................... (7,471,000) 10,178,000 (4,779,000)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under notes payable........................... 26,185,000 43,626,000 42,094,000
Repayment of notes payable............................... (21,219,000) (35,802,000) (31,864,000)
Proceeds from subsidiary's issuance of common stock...... 10,000,000 36,109,000 --
Proceeds from issuance of common stock................... -- 5,456,000 --
Proceeds from exercise of warrants and stock options..... 15,000 8,979,000 34,000
Repayment of debentures.................................. -- (44,000) (36,000)
------------ ------------ ------------
Net cash provided by financing activities......... 14,981,000 58,324,000 10,228,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents....... (21,823,000) 30,357,000 (13,822,000)
Cash and cash equivalents at beginning of year............. 31,612,000 1,255,000 15,077,000
------------ ------------ ------------
Cash and cash equivalents at end of year................... $ 9,789,000 $ 31,612,000 $ 1,255,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 36
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company which principally develops, produces, and distributes
original feature films and television programming. Feature films are developed
and produced principally for the theatrical, video and pay cable motion picture
markets. Television programming includes television series, mini-series, movies
for television, animation, reality and game show programming.
The Company established feature film production operations in 1993. In
1994, an international theatrical film subsidiary was established to expand into
foreign theatrical distribution. In 1995, the Company formed KLC/New City
Tele-Ventures ("KLC/New City") to acquire films for distribution through other
delivery systems, including pay cable, pay-per-view, basic cable,
video-on-demand and satellite systems. In 1997, the Company acquired control of
US SEARCH.com Inc. ("US SEARCH.com"), a leading provider of fee-based public
record search and other customized individual reference services. Subsequent to
fiscal 2000, the Company sold a portion of its investment in US SEARCH.com and
reduced its ownership interest below 50%. In November 1998 the Company launched
a 24 hour Spanish language movie channel called Gran Canal Latino.
Fiscal Year
The Company's fiscal year ends on September 30. US SEARCH.com has a
December 31 fiscal year end, however its financial position and results are
consolidated herein from October 1 through September 30 of each year. All
references to years herein refer to the Company's fiscal year end.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and all majority-owned subsidiaries. Entities in which the Company
holds a 20% to 50% interest are not consolidated, but are accounted for under
the equity method. Entities in which the Company holds less than a 20% interest
are accounted for under the cost method and included in other assets. All
significant intercompany balances and transactions have been eliminated.
In 1995, the Company formed the 82.5%-owned subsidiary KLC/New City. Since
establishment, the Company has consolidated 100% of the net losses of that
subsidiary.
In November 1997, the Company acquired 80% of US SEARCH.com and commenced
consolidation of its accounts. US SEARCH.com has incurred net losses since
acquisition and the Company funded 100% of such losses through its initial
public offering (Note 2). The Company recognized 100% of the net losses through
June 30, 1999. Subsequent to the public offering, the Company has recognized a
minority interest in the net losses and equity of US SEARCH.com proportionate to
the minority ownership percentage, which has been between 44.8% and 47.4%. In
future periods, the Company will not be consolidating net earnings or losses of
US SEARCH.com as it's ownership percentage has been reduced below 50% following
the sale of 3,500,000 shares of US SEARCH.com in October 2000.
In November 1997, the Company established KL/Phoenix, an 80%-owned joint
venture for Latin American distribution of film and television programs. In
November 1998, the Company established Gran Canal Latino, an 80%-owned joint
venture for satellite broadcasting of Spanish and Portuguese language film and
television programs. Since establishment, the Company has consolidated 100% of
these ventures' net losses.
35
<PAGE> 37
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications
Certain reclassifications have been made to conform prior year balances
with the current presentation.
Revenue Recognition
Revenues from feature film and television program distribution licensing
agreements are recognized on the date the completed film or program is delivered
or becomes available for delivery, is available for exploitation in the relevant
media window purchased by that customer or licensee and certain other conditions
of sale have been met pursuant to criteria specified by SFAS No. 53, Financial
Reporting By Producers and Distributors of Motion Picture Films. Revenues from
barter transactions, whereby the program is exchanged for television advertising
time which is sold to product sponsors, are recognized when the television
program has aired and all conditions precedent have been satisfied. The revenue
cycle generally extends 7 to 10 years on film and television products.
US SEARCH.com generates revenues by performing various information search
services for customers. Revenue is recognized when the results of the search
services are delivered to clients. The terms of each sale do not provide for
client refunds after search services have been delivered, however, in certain
instances, where the clients indicate that the initial search is unsuccessful,
US SEARCH.com may perform, at no charge to the client, up to three identical
searches during the one year period following their first search. The costs
related to such additional searches are recorded in the period of the initial
sale and are based upon the estimated number of additional searches. In
addition, where clients request to broaden the scope of their fully automated
searches, US SEARCH.com may apply up to a portion of the cost of the client's
fully automated searches towards the cost of the broader and more extensive
searches. The estimated credits are recorded in the period of the initial sale
and are based upon the amount estimated to be redeemed by clients. To date, the
costs of additional searches and estimated credits to be provided in future
periods have not been material.
Advertising Costs
US SEARCH.com's advertising production costs are expensed the first time
the advertisement is run. Media costs are expensed in the month the advertising
appears. Advertising expense related to US SEARCH.com for fiscal 2000 and 1999
was $29,619,000 and $15,592,000, respectively.
Concentration of Risk
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. Cash and cash equivalents are deposited throughout the world with
high credit quality financial institutions.
The Company's customers are located throughout the world. For certain
revenue streams, the Company does not require guarantee of payment and
establishes an allowance for doubtful accounts based upon historical trends and
other information. To date, such losses have been within management's
expectations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Restricted and Reserved Cash
At September 30, 2000 and 1999, the Company had $1,958,000 and $2,088,000,
respectively, in restricted cash related to deposits held at a British bank
pursuant to film sale/leaseback transactions, and $2,200,000 which are
restricted deposits of US SEARCH.com pledged as collateral on an outstanding
letter of credit
36
<PAGE> 38
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related to a recent lease of a facility ($2,000,000 at September 30, 1999). In
addition, the Company has $77,000 in cash collected and reserved for use by
Chase Manhattan Bank to be applied against the Company's outstanding borrowings
under the terms of the Company's credit facility ($734,000 at September 30,
1999).
Allowances for Doubtful Accounts
The Company provides for doubtful accounts based on historical collection
experience and periodically adjusts the allowance based on the aging of accounts
receivable and other conditions. Receivables are written off against the
allowance in the period they are deemed uncollectible.
Accounting for Film and Television Program Costs
The Company capitalizes direct costs incurred to produce a film or
television project. The costs include interest expense funded under production
loans, certain exploitation costs and production overhead. Capitalized
exploitation or distribution costs include prints and advertising that is
expected to benefit the film in future markets. These costs, including
management's estimates of anticipated total costs, are amortized each period on
an individual film or television program basis in the ratio that the current
period's gross revenues from all sources for the program bear to management's
estimate of anticipated total gross revenues for such film or program from all
sources. Revenue estimates are reviewed quarterly and adjusted where
appropriate.
Film and television program costs are stated at the lower of unamortized
cost or estimated net realizable value. Losses are charged to operations through
additional amortization.
Investments in Equity Securities -- Cost Method
In April 1999, the Company issued 468,883 shares of common stock with a
value of $5,820,000 to The Harvey Entertainment Company ("Harvey") in exchange
for convertible preferred stock and detachable warrants. The investment is not
subject to Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as the
Harvey preferred stock is not publicly traded.
The preferred stock is convertible into publicly traded common shares of
Harvey and earns mandatory dividends payable in cash or additional shares of
Harvey preferred stock. The Company recognized dividend earnings, in the form of
additional Harvey preferred shares, totaling $406,000 for the year ended
September 30, 2000 and $167,000 for the year ended September 30, 1999.
The detachable warrants are convertible into Harvey common stock and were
fully exercisable at issuance. At September 30, 2000, the Company has warrants
exercisable into 388,235 shares of Harvey common stock. The warrants begin to
expire in 2005.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets. Leasehold improvements and equipment under capital
leases are amortized over the shorter of the estimated useful life or the life
of the lease. Depreciation and amortization periods by asset category are as
follows:
<TABLE>
<S> <C>
Equipment........................... 3 - 10 years
Furniture and fixtures.............. 5 - 7 years
Leasehold improvements.............. Shorter of useful life or lease term
Equipment under capital lease....... Shorter of useful life or lease term
</TABLE>
37
<PAGE> 39
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maintenance and repairs are charged to expense as incurred while renewals
and improvements are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation, with any resulting gain or loss included in the Statement of
Operations.
Long-Lived Assets
The carrying value of long-lived assets, consisting primarily of
investments and property and equipment, is periodically reviewed by management.
The Company records impairment losses on long-lived assets when events or
circumstances indicate that such assets might be impaired. Measurement of any
impairment would include a comparison of estimated future cash flows anticipated
to be generated during the remaining life of the long-lived asset to the net
carrying value of the long-lived asset.
During the quarter ended September 30, 2000 the Company recorded an
impairment provision of $3,893,000 relating to an investment in equity
securities.
Participants' Share Payable and Talent Residuals
The Company charges profit participation and talent residual costs to
expense in the same manner as amortization of film and television program costs.
Payments for profit participations are made in accordance with the participants'
contractual agreements. Payments for talent residuals are remitted to the
respective guilds in accordance with the provisions of their union agreements.
Production Advances
The Company receives license fees for projects in the production phase.
Production advances are generally nonrefundable and are recognized as earned
revenue when the film or television program is available for delivery.
International Currency Transactions
The majority of the Company's foreign sales transactions are payable in
U.S. dollars. Accordingly, international currency transaction gains and losses
included in the consolidated statements of operations for the three years ended
September 30, 2000 were not significant.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
38
<PAGE> 40
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from estimated amounts.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees," and complies with the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost, if any, is recognized over the respective vesting period
based upon the difference on the grant date between the fair value of the
Company's common stock and the grant price. Pro forma disclosures reflect stock
option grants subsequent to fiscal 1996.
Fair Value of Financial Instruments
The recorded value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, contractual obligations
and participants' share payable for talent residuals approximate their fair
value due to the relatively short maturities of these instruments. The fair
value of notes payable approximates the recorded value due to the stated
interest rate on such instruments. Management estimates that the fair value of
the convertible subordinated debentures is less than the recorded value due to
the Company's current liquidity position and the subordinated position that
these instruments take to the Company's principal credit facility.
Reverse Stock Split
In September 1997 the Company effected a 1-for-6 reverse split of the
issued and outstanding shares of common stock. All references to shares
outstanding give effect to this reverse stock split as if it had occurred at the
beginning of the earliest period presented.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net earnings
(loss) per share is computed using the weighted average number of common shares
and common equivalent shares outstanding during the period. Common equivalent
shares related to options and warrants are excluded from the computation when
their effect is antidilutive.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." This statement established standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income generally
represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997, and requires
restatement of earlier periods presented. SFAS No. 130 defines comprehensive
income as net income plus all other changes in equity from nonowner sources. The
Company had no other comprehensive income items and accordingly net income
equals comprehensive income.
Segment Reporting
The company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" for the
year ended September 30, 1999. Comparative fiscal 1998 disclosures have been
included. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
39
<PAGE> 41
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products or services, geographic areas,
and major customers. The Company's management reporting structure provides for
two reportable segments.
Recent Accounting Pronouncement
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants recently issued Statement of Position ("SOP")
00-02, "Accounting by Producers or Distributors of Films". The SOP establishes
new accounting standards for producers and distributors of films, including
changes in revenue recognition and accounting for advertising and development
costs. Additionally, in June 2000, the FASB issued SFAS No. 139, which rescinds
SFAS No. 53 on financial reporting by motion picture film producers and
distributors and requires public companies to follow the requirements of SOP
00-02. The SOP is effective for fiscal years beginning after December 15, 2000.
The Company plans to early-adopt the SOP in its fiscal year beginning October 1,
2000. As a result of adopting the SOP the Company expects to record a one-time,
pre-tax non-cash charge of approximately $2,000,000.
(2) LIQUIDITY AND MANAGEMENT PLANS
Management does not expect that existing resources and cash expected to be
generated from operating activities will be sufficient to fund the combined
requirements of the Company's planned production, acquisition and distribution
activities and mandatory interest and debt repayments in the next twelve months.
The Company is in active negotiations with The Chase Manhattan Bank to
reschedule interest and principal repayments on its existing credit facility and
is exploring strategic alternatives, including possible asset sales and
additional licensing activities with third parties to enhance liquidity. There
can be no assurance that such negotiations will be successful or that asset
sales or other transactions will generate sufficient funds to enable the Company
to meet its obligations as they become due. In the event Chase restricts the
Company's use of capital, the Company will not be able to meet operating
requirements.
(3) SUBSIDIARY PUBLIC OFFERING
On June 25, 1999 US SEARCH.com consummated its initial public offering
("offering") and issued 4,500,000 new shares of its common stock to the public.
US SEARCH.com obtained $36,109,000 in net proceeds related to the offering. US
SEARCH.com is traded on the NASDAQ National Market under the symbol "SRCH."
Concurrent with the offering, the Company exercised warrants to purchase
1,360,173 additional shares of US SEARCH.com common stock for $2,752,000. The
Company has no remaining warrants to purchase additional common stock of US
SEARCH.com.
In conjunction with the offering, the Company sold 1,500,000 of its shares
in US SEARCH.com to the public in exchange for net proceeds of $12,555,000. The
Company recognized a $13,148,000 pre-tax gain on the sale of the 1,500,000
shares.
Subsequent to the offering, the Company retained a 55.2% interest in the
subsidiary, which was reduced to 52.6% as of the year ended September 30, 2000.
Subsequent to fiscal 2000, the Company sold a portion of its investment in US
SEARCH.com and reduced its ownership interest below 50%. During fiscal 1999, the
Company recognized a $21,018,000 pre-tax gain based on its revised proportionate
share in the subsidiary's increased net equity.
40
<PAGE> 42
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) FILM AND TELEVISION PROGRAM COSTS
Film and television program costs consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
In process or development......................... $ 7,311,000 $20,472,000
Released, net of accumulated amortization......... 73,677,000 71,027,000
----------- -----------
Total................................... $80,988,000 $91,499,000
=========== ===========
</TABLE>
Based upon present estimates of anticipated future revenues at September
30, 2000, approximately 70% of the costs related to released films and
television programs will be amortized during the three-year period ending
September 30, 2003.
The Company capitalized interest of $600,000, $372,000 and $982,000 to film
and television program costs for the years ended September 30, 2000, 1999, and
1998, respectively. During the same respective periods, $7,738,000, $8,154,000
and $7,243,000 of total interest costs were incurred.
(5) INVESTMENTS IN UNCONSOLIDATED ENTITIES, AT EQUITY
Significant investments in unconsolidated entities are accounted for under
the equity method ("equity affiliates"). These entities are principally engaged
in the production and distribution of films and television programs. The
Company's share of earnings of these equity affiliates is included in income as
earned. Investments in equity affiliates at September 30 consist of the
following:
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE 2000 1999
-------------------- ----------- -----------
<S> <C> <C> <C>
BLT Ventures.......................... 50% $ 856,000 $ 808,000
Cracker Company LLC................... 50% 3,951,000 5,829,000
TV First.............................. 0% -- 357,000
Grendel Productions LLC............... 25% 2,578,000 2,161,000
Swing Ventures........................ 50% 1,313,000 1,188,000
Trick Productions..................... 50% 1,068,000 1,047,000
Denial Venture........................ 50% 508,000 303,000
World Wide Multimedia................. 30% 4,361,000 --
Others................................ 20% 348,000 352,000
----------- -----------
$14,983,000 $12,045,000
=========== ===========
</TABLE>
41
<PAGE> 43
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The summarized unaudited information below at September 30 represents an
aggregation of the Company's equity affiliates:
FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA
Assets.................................................... $32,747,000 $22,710,000
Liabilities............................................... 1,397,000 4,133,000
Net assets................................................ 31,350,000 18,577,000
Company's equity in net assets............................ $14,983,000 $12,045,000
</TABLE>
<TABLE>
<CAPTION>
2000 1999 1998
--------- ----------- -----------
<S> <C> <C> <C>
EARNINGS DATA
Operating revenues........................... $ 797,000 $ 4,229,000 $31,871,000
Gross profit (loss).......................... 434,000 (293,000) 963,000
Net earnings (losses)........................ (762,000) (1,168,000) 972,000
Company's equity in net (losses)............. $(222,000) $ (520,000) $ (330,000)
</TABLE>
No dividends were received from equity affiliates for the years ended
September 30, 2000, 1999, or 1998.
(6) CREDIT AGREEMENT AND FINANCING ARRANGEMENTS
Credit arrangements and borrowings consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Note payable to bank, under a revolving credit facility
collateralized by substantially all Company assets,
interest at Libor (6.62% at September 30, 2000) plus 3%,
outstanding principal balance due September 2001.......... $68,000,000 $66,455,000
Notes payable to banks and/or financial institutions
consisting of production loans principally collateralized
by film rights, interest at rates from Libor (6.62% at
September 30, 2000) plus 2% to Prime (9.50% at September
30, 2000) plus 2.5%, and maturities at varying dates
through December 2001..................................... 15,599,000 16,272,000
Term note payable to bank, collateralized by certain
partnership interests, bearing interest at 7% per annum,
payable quarterly, due February 2005...................... 2,000,000 --
Private placement notes, collateralized by 2,000,000 shares
of the Company's US SEARCH.com shareholdings, bearing
interest at 10% per annum, maturing October 2000.......... 1,500,000 --
Series B Convertible Subordinated Debentures due December
2000, bearing interest at 13 3/4% per annum payable
monthly, net.............................................. 1,565,000 1,535,000
8% Convertible Subordinated Debentures due December 2000,
interest payable February 1 and August 1, net............. 599,000 734,000
Trade notes payable and debt of US SEARCH.com............. 792,000 198,000
----------- -----------
Total credit agreements and financing
arrangements................................... $90,055,000 $85,194,000
=========== ===========
Total notes payable............................... $87,891,000 $82,925,000
=========== ===========
Total convertible subordinated debentures, net of
deferred issuance costs........................ $ 2,164,000 $ 2,269,000
=========== ===========
</TABLE>
42
<PAGE> 44
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At September 30, 2000 the Company had a $75,000,000 revolving credit
facility with a syndicated group of banks. Chase Manhattan Bank is the agent
bank. As extended, the credit facility expires September 30, 2001.
On December 8, 2000, the Company filed a borrowing base certificate with
The Chase Manhattan Bank under its Credit, Security, Guaranty and Pledge
Agreement. This certificate reported that the Company is materially over its
borrowing limits which would be an event of default under the Credit Agreement
for which the Agent may terminate the Agreement and/or declare all amounts due
and payable thereunder immediately due and payable, and the Company does not
believe its present cash position would enable it to repay the amounts due.
Additionally, the credit agreement contains restrictive covenants which include,
but are not limited to, limitations on additional indebtedness, liens,
investments, disposition of assets, guarantees, deficit financing, capital
expenditures, affiliate transactions and the use of proceeds, and prohibit the
payment of cash dividends and prepayment of most subordinated debt. In addition,
the Company must maintain a minimum liquidity level, limit overhead expense and
meet certain financial ratios. The bank could declare an event of default if
either of Messrs. Locke or Kushner failed to be the Chief Executive Officer of
the Company or if any person or group acquired ownership or control of capital
stock of the Company having voting power greater than the voting power at the
time controlled by Messrs. Kushner and Locke combined (other than any
institutional investor able to report its holdings on Schedule 13G which holds
no more than 15% of such voting power). The Company received a waiver of default
due to non-compliance with an overhead covenant for fiscal 1999.
At September 30, 2000, the Company had outstanding $15,599,000 of
production loans to consolidated entities from Comerica Bank -- California
("Comerica") and Far East National Bank in addition to $20,000 in loans assumed
from a previously consolidated entity. The unused portion of credit available
under these production loans at September 30, 2000 was $1,707,000. The Company
provided $1,500,000 in corporate guarantees for loans to consolidated entities
and $400,000 for one loan to an equity affiliate. The guarantees are callable in
the event the respective borrower does not repay the loan made by the respective
maturity date. Deposits paid by distributing licensees prior to the delivery of
the financed pictures are held as restricted cash collateral by the lenders.
Additionally, the Company believes the default to the senior credit line and
debentures may materially impact the Company's ability to extend the maturity
dates of its production loans, and may limit the Company's ability to obtain
further production loans.
During the year ended September 30, 1999, $1,616,000 of the Series B
Debentures principal were converted into 174,382 newly-issued shares of common
stock of the Company at a rate of $9.2664 per share. No such conversions were
made in the year ended September 30, 2000. Unamortized discounts were $7,000 at
September 30, 2000. Approximately $32,000 and $49,000 of these costs were
amortized under the straight-line method as interest expense for the years ended
September 30, 2000 and 1999, respectively. As of September 30, 2000, $1,572,000
principal amount of the debentures were outstanding. The principal balance
became due and payable on December 15, 2000. The Company has not repaid the
debentures, and is exploring its options for the debentures.
During the year ended September 30, 2000, $150,000 of the 8% Debentures
principal were converted into 25,641 new-issued shares of common stock at a rate
of $5.85 per share. During the year ended September 30, 1999, $3,948,000 of the
8% Debentures principal were converted into 674,873 new-issued shares of common
stock. Unamortized discounts were $3,000 at September 30, 2000. Approximately
$14,000 and $43,000 of these costs were amortized under the straight-line method
as interest expense for the years ended September 30, 2000 and 1999,
respectively. As of September 30, 2000, $602,000 principal amount of the
debentures were outstanding. The principal balance became due and payable on
December 15, 2000. The Company has not repaid the debentures, and is exploring
its options for the debentures.
The debentures are subordinated to all existing and future senior
indebtedness. The term senior indebtedness includes principal and interest on
all indebtedness of the Company to banks, insurance
43
<PAGE> 45
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies and similar institutional lenders, and to the public for securities
registered under the Securities Act of 1933. Senior indebtedness does not
include other debentures, indebtedness to affiliates and indebtedness expressly
subordinated to or on parity with the debentures.
In February 2000 the Company obtained a $2,000,000 loan from Far East
National Bank. Interest is payable quarterly commencing March 2000. Proceeds
were used to obtain limited partnership units in World Wide Multimedia LLP,
which collateralize the loan. The Company has obtained additional limited
partnership units in World Wide Multimedia LLP in exchange for certain film
rights.
In April 2000, certain individuals, including Messrs. Kushner and Locke,
purchased notes from the Company in the aggregate principal amount of $1,500,000
in a private placement pursuant to Regulation D of the Securities Exchange Act
of 1934. The notes bore interest at the rate of 10% per annum payable at
maturity. At the scheduled six month maturity the holders were entitled to
receive, at their election, either a cash payment equal to 15% of the principal
amount of the notes purchased or a warrant for a number of shares of common
stock equal to their loan principal amount divided by $10. The warrant would be
exercisable at 110% of the Company's common stock market value at the loan
closing date for a three-year term from the date of issuance. The notes became
due in October 2000 and were repaid at that time. The notes were collateralized
by a pledge of 2,000,000 shares of the Company's US SEARCH.com shareholdings.
Credit arrangements and borrowings are due as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Fiscal Year Ending September 30,
2001.................................................. $83,597,000
2002.................................................. 4,458,000
2003.................................................. --
2004.................................................. --
2005.................................................. 2,000,000
-----------
Total......................................... $90,055,000
===========
</TABLE>
(7) INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
CURRENT:
Federal............................................. $ -- $186,000 $154,000
State............................................... -- 540,000 27,000
------- -------- --------
-- 726,000 181,000
DEFERRED:
Federal............................................. -- -- --
State............................................... -- -- --
------- -------- --------
Total income tax expense.................. $ -- $726,000 $181,000
======= ======== ========
</TABLE>
44
<PAGE> 46
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the statutory Federal income tax rate to the effective
rate is presented below:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate........................... (34)% 34% (34)%
Alternative minimum taxes and permanent differences......... 0 3 2
Change in valuation allowance............................... 36 (30) 34
State income taxes, net of Federal tax benefit.............. (2) 6 1
--- --- ---
0% 13% 3%
=== === ===
</TABLE>
Significant components of deferred tax assets and liabilities, using
enacted tax rates, are as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------
2000 1999
------------ -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards and credits............. $ 17,404,000 $13,589,000
Allowance for doubtful accounts and other reserves....... 2,007,000 1,169,000
Deferred film license fees............................... 1,247,000 1,306,000
Other temporary differences.............................. 1,792,000 1,953,000
Partnerships............................................. 564,000 --
Depreciation............................................. -- 85,000
State taxes.............................................. -- 212,000
------------ -----------
Total gross deferred assets.................... 23,014,000 18,314,000
Valuation allowance............................ (22,904,000) (5,432,000)
------------ -----------
Net deferred tax assets........................ $ 110,000 $12,882,000
============ ===========
DEFERRED TAX LIABILITIES:
Film amortization........................................ $ -- $ 5,150,000
Partnerships............................................. -- 94,000
Depreciation............................................. 13,000 --
Deferred gain on sale of subsidiary stock................ -- 7,638,000
State taxes.............................................. 97,000 --
------------ -----------
Total deferred tax liabilities................. $ 110,000 $12,882,000
============ ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. Due to the uncertainty surrounding the realizability of
the net deferred tax assets, a full valuation allowance has been established as
management believes that it is more likely than not, based upon available
evidence, that the deferred tax assets will not be realized.
Due to the sale of US SEARCH.com common stock in connection with the
subsidiary's initial public offering in June 1999, effective July 1999, US
SEARCH.com will no longer join the Company in filing of a consolidated income
tax return. The Internal Revenue Code of 1986, as amended, includes provisions
which may limit the net operating loss carryforwards available for use in any
given year if certain events occur, including significant changes in ownership.
Due to the Company's initial public offering and other issuances of common stock
and common stock equivalents, utilization of the Company's net operating loss
carryforwards to
45
<PAGE> 47
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
offset future income may be limited. Accordingly, as of September 30, 2000, the
Company and US SEARCH.com had net operating loss and tax credit carry-forwards
as follows:
<TABLE>
<CAPTION>
AMOUNT
------------------------------ EXPIRATION DATE
KUSHNER-LOCKE US SEARCH.COM BEGINNING
------------- ------------- ---------------
<S> <C> <C> <C>
NOLs for Federal tax purposes.......... $47,480,000 $27,540,000 Fiscal 2007
NOLs for state tax purposes............ 8,604,000 13,770,000 Fiscal 2003
International tax credits.............. 493,000 -- Fiscal 2001
General business credits............... 191,000 -- Fiscal 2002
Alternative minimum tax credits........ 311,000 -- N/A
</TABLE>
(8) WARRANTS AND STOCK OPTIONS
Warrants
A summary of exercisable warrants at September 30, 2000 is as follows:
<TABLE>
<CAPTION>
WARRANT HOLDER AMOUNT EXERCISE PRICE EXPIRATION DATE
-------------- ------- -------------- ---------------
<S> <C> <C> <C>
Allen & Company warrants.................... 500,000 $2.0625 September 2004
Friedman warrants........................... 50,000 $2.0625 September 2004
Friedman consulting warrants................ 35,000 $1.6875 June 2002
-------
585,000
=======
</TABLE>
In 1994, in connection with the 8% Convertible Subordinated Debentures
offering, the Company issued warrants to the underwriter to purchase up to
$1,643,700 of the aggregate principal amount of the debentures at an exercise
price equal to 120% of the principal amount of the debentures, subject to
adjustment in certain circumstances. The warrants were fully exercised in fiscal
1999 for $1,775,000 and the Company issued new shares of common stock.
In 1994, in connection with the 9% Convertible Subordinated Debenture
offering, the Company issued warrants to the underwriters to purchase up to
$505,000 of the aggregate principal amount of the debentures sold at an exercise
price equal to 120% of the principal amount of the debentures, subject to
adjustments in certain circumstances. The warrants were exercisable through July
1999, when they expired unexercised.
In 1996 the Company had a public offering of 4,750,000 units (the "unit
offering"). Each unit consisted of two pre-reverse split shares of common stock
and one Class C Redeemable Common Stock Purchase Warrant to purchase one share
of common stock, at an exercise price of $6.8625 per share, as adjusted. In
connection with the unit offering, the Company issued warrants to the
underwriter to purchase 71,167 units at an adjusted exercise price of $19.1825
each (the "Underwriter Warrants"). In addition, the Company issued warrants to a
consultant to purchase 47,500 units at the same exercise price (the "Consultant
Warrants").
In April 1999, the Company called all Class C Warrants for redemption in
May 1999. Included in the redemption were the Class C Warrants issued as a part
of the Underwriter Warrants and Consultant Warrants. The Company issued 794,215
shares of common stock and received proceeds of $5,419,000 from the exercise of
the Class C Warrants. A total of 14,410 warrants were redeemed at a total cost
of $1,441.
In June 1997 the Company issued warrants to I. Friedman Equities, Inc. (the
"Friedman consulting warrants") to purchase up to 50,000 shares of common stock.
In September 1997, the Company issued additional warrants to I. Friedman
Equities, Inc. of 50,000 (the "Friedman warrants"). In August 1999, 15,000
Friedman consulting warrants were exercised.
In September 1997, in connection with a consulting agreement, the Company
issued warrants to Allen & Company, Incorporated (the "Allen & Company
Warrants") to purchase 500,000 share of common stock.
46
<PAGE> 48
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The value assigned to the warrants of $1,339,000 is recorded as consulting
expense over the term of the agreement with a portion allocated to the private
placement financing consummated in fiscal 1999. For the years ended September
30, 2000, 1999 and 1998, the Company recognized consulting expense of $230,000,
$579,000 and $332,000, respectively. At September 30,1999, the warrants were
fully vested.
Options
In 1989, the Board of Directors approved a stock incentive plan (the
"Plan") that covers directors, third party consultants and advisors, independent
contractors, officers and other employees of the Company. In April 1999 the
stockholders approved an increase in the number of shares of Common Stock
reserved for issuance from 1,250,000 shares to 1,820,000 shares. In March 2000
the stockholders approved an additional increase in the number of shares of
Common Stock reserved for issuance from 1,820,000 to 2,500,000. The Plan allows
for the issuance of options to purchase shares of the Company's common stock at
an exercise price at least equal to the fair value of the stock on the date of
grant. Options generally vest over a three year term subject to continued
employment or the completion of services rendered, and have a maximum term of
ten years. The Company granted options during the years ended September 30, 2000
and 1999 that resulted in compensation of $6,000 and $150,000, respectively.
There were no option grants that resulted in compensation expense for the year
ended September 30, 1998. At September 30, 2000, 304,361 shares remained
available for future grant.
The following table summarizes stock option activity for the period from
September 30, 1997 to September 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICES
--------- --------------- ----------------
<S> <C> <C> <C>
Balance at September 30, 1997.......... 1,095,359 $1.50 - $11.64 $4.65
Granted Fiscal 1998.................. 121,668 $1.50 - $ 4.00 $2.65
Options Expired/Canceled............. (112,501) $2.63 - $ 6.36 $3.98
Options Exercised.................... (9,000) $3.75 $3.75
---------
Balance at September 30, 1998.......... 1,095,526 $1.50 - $11.64 $2.93
Granted Fiscal 1999.................. 502,243 $2.97 - $10.25 $4.63
Options Exercised.................... (317,309) $1.50 - $ 6.36 $2.74
---------
Balance at September 30, 1999.......... 1,280,460 $1.50 - $11.64 $4.42
Granted Fiscal 2000.................. 536,667(1) $0.00 - $ 6.56 $0.93
Options Expired/Canceled............. (159,519) $1.88 - $11.64 $7.33
Options Exercised.................... (435,500)(1) $0.00 - $ 1.88 $0.03
---------
Balance at September 30, 2000.......... 1,222,108 $1.50 - $10.25 $4.07
=========
</TABLE>
---------------
(1) Includes 425,000 shares of restricted stock granted out of the Common Stock
reserved for issuance under the Company's Plan.
Additional information with respect to the outstanding options as of
September 30, 2000 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
WEIGHTED AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
--------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.50 - $ 3.00 400,443 7.07 years $1.92 323,777 $1.93
$3.01 - $ 6.00 714,166 6.63 years $4.76 668,333 $4.78
$6.01 - $11.64 107,499 8.45 years $7.49 92,499 $8.31
--------- ---------
1,222,108 1,084,609
========= =========
</TABLE>
47
<PAGE> 49
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options exercisable at September 30, 1999 and 1998 were 1,060,185 and
671,087, respectively. The weighted average exercise price of these exercisable
options at September 30, 1999 and 1998 were $4.83 and $4.79, respectively.
The pro forma effects of applying SFAS No. 123 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
------------ ---------- -----------
<S> <C> <C> <C>
Net earnings (loss)
As reported............................... $(39,254,000) $4,471,000 $(6,336,000)
============ ========== ===========
Pro forma................................. $(40,442,000) $3,689,000 $(6,662,000)
============ ========== ===========
Earnings (loss) per share
As reported............................... $ (2.84) $ .38 $ (.69)
============ ========== ===========
Pro forma................................. $ (2.92) $ .31 $ (.73)
============ ========== ===========
</TABLE>
The pro forma disclosure of applying SFAS No. 123 is estimated on the
option's date of grant using assumptions of the expected term to exercise,
volatility, risk-free rate, and the expected dividend yield. A summary of these
assumptions is as follows:
<TABLE>
<CAPTION>
DIVIDEND
EXPECTED TERM VOLATILITY RISK-FREE RATE YIELD
------------- ------------ -------------- --------
<S> <C> <C> <C> <C>
Fiscal 2000.................... 10 years 80.08% 6.46% - 6.97% 0%
Fiscal 1999.................... 10 years 71.6 - 76.2% 5.11% - 7.09% 0%
Fiscal 1998.................... 10 years 71.6% 5.67% - 5.89% 0%
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
Compensation
Messrs. Kushner and Locke entered into employment agreements that expire in
March 2004. Those agreements provide for base compensation to each individual of
$500,000, $525,000, $550,000 and $575,000 in the fiscal years ended September
30, 2001, 2002, 2003 and 2004, respectively. The Company also provides Messrs.
Kushner and Locke with certain fringe benefits, including $3,500,000 of term
life insurance with a split dollar ownership structure and disability insurance
for each person.
The Company has agreements with five other employees and officers of the
Company, excluding US SEARCH.com, which provide for annual base salaries each
ranging from $117,500 to $250,000, eligibility for options, performance bonuses,
and severance payments.
Employee Benefit Plans
The Company participates in various multiemployer defined benefit and
defined contribution pension plans under union and industry agreements. These
plans include substantially all temporary film production employees covered
under various collective bargaining agreements. The Company incurred $254,000,
$425,000, and $345,000 of multi-employer plan costs in fiscal 2000, 1999, and
1998, respectively. Such costs are capitalized as a component of film and
television programming costs. The Company funds the costs of such plans as
incurred.
Leases
The Company and its subsidiaries lease certain facilities and equipment.
The leases generally provide for the lessee to pay taxes, maintenance, insurance
and certain other operating costs of the leased property.
48
<PAGE> 50
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At September 30, 2000, the future minimum payments under leases that have
initial or remaining noncancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
------------------------- -------- ----------
<S> <C> <C>
2001............................................... $198,000 $ 674,000
2002............................................... 61,000 674,000
2003............................................... 37,000 708,000
2004............................................... -- 720,000
2005............................................... -- 540,000
Thereafter......................................... -- --
-------- ----------
Total minimum future lease rental payments........... $296,000 $3,316,000
==========
Less: amounts representing interest.................. (21,000)
--------
Capitalized lease obligations, included within
Contractual obligations in the consolidated balance
sheet at September 30, 2000........................ $275,000
========
</TABLE>
Rental expense for all operating leases for the years ended September 30,
2000, 1999 and 1998 was approximately $1,340,000, $678,000 and $657,000,
respectively.
Film and Television Program Production
The Company has certain films and television projects in development (Note
3). The Company routinely makes contractual down payments to acquire film
distribution rights. This initial advance for rights ranges from 10% to 30% of
the total purchase price. The balance of the payment is generally due upon the
complete delivery by third party producers of acceptable film and video
materials and other proof of rights held and insurance policies that may be
required for the Company to begin exploitation of the product.
Litigation
The Company is involved in certain legal proceedings and claims arising out
of the normal course of business. Management believes the resolution of these
matters will not have a material adverse effect upon the Company's results of
operations, financial position or cash flows.
(10) RELATED PARTY TRANSACTIONS
In fiscal 1998 Messrs. Kushner and Locke each earned annual base
compensation of $425,000. In fiscal 1999 Messrs. Kushner and Locke each earned
base compensation at an annual rate of $450,000 through March 1999 and $475,000
thereafter. In fiscal 2000 Messrs. Kushner and Locke each earned base
compensation at an annual rate of $475,000. In March 1999, the Company granted
to each of Messrs. Kushner and Locke 50,000 shares of restricted common stock
and accelerated the vesting of 33,333 then unvested stock options. In September
1999, the Company granted to each of Messrs. Kushner and Locke bonuses of
$500,000 and options to purchase 100,000 shares of common stock. In April 2000,
the Company granted to each of Messrs. Kushner and Locke 200,000 shares of
restricted common stock, with the restrictions lapsing in equal portions over a
three-year period. These shares are considered issued but not outstanding at
September 30, 2000 due to the aforementioned restrictions.
49
<PAGE> 51
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of stock and option compensation to each of
Messrs. Kushner and Locke for the three-year period ended September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS/SHARES VESTED, NET OF EXERCISE
GRANT DATE ISSUED EXERCISE PRICE AT SEPTEMBER 30, 2000 VESTING REQUIRED
---------- -------------- -------------- ----------------------- ----------------
<S> <C> <C> <C> <C>
February 1999................ 50,000 N/A N/A (1)
September 1999............... 100,000 $4.6875 100,000 (2)
April 2000................... 200,000 N/A N/A (3)
</TABLE>
---------------
(1) Restrictions removed in June 1999.
(2) Immediately vested upon grant.
(3) Vest over a three year period from April 2001 to April 2003.
Outside directors each receive annual compensation between $15,000 and
$25,000 in cash. The following is a summary of option compensation to outside
directors for the three year period ended September 30, 2000.
<TABLE>
<CAPTION>
VESTED, NET OF
OPTIONS EXERCISE EXERCISES AT VESTING
HOLDER GRANT DATE ISSUED PRICE SEPTEMBER 30, 2000 REQUIRED
------ -------------- ------- -------- ------------------ --------
<S> <C> <C> <C> <C> <C>
Irwin Friedman.............. June 1998 16,667 $2.8438 11,111 (1)
Irwin Friedman.............. February 1999 13,333 $7.19 13,333 (2)
Irwin Friedman.............. September 1999 13,333 $4.8125 13,333 (2)
Stuart Hersch............... August 1997 16,667 $1.875 16,667 (1)
Stuart Hersch............... February 1999 13,333 $7.19 13,333 (2)
Stuart Hersch............... September 1999 13,333 $4.8125 13,333 (2)
Stuart Hersch............... September 1999 40,000 $4.8125 40,000 (2)
John Lannan................. June 1998 16,667 $2.8438 11,111 (1)
John Lannan................. February 1999 13,333 $7.19 13,333 (2)
John Lannan................. September 1999 13,333 $4.8125 13,333 (2)
</TABLE>
---------------
(1) Vests one-third at grant date and one-third over next two anniversaries of
the grant date.
(2) Immediately vested upon grant.
The Company loaned the President and Chief Operating Officer a total of
$300,000 in September and October 1996. The loan bears interest at 8% per year
and is due through October 2001. Pursuant to his employment contract, during
fiscal 1998 and fiscal 1999 $50,000 and $100,000 principal amounts of the loan,
respectively, plus interest on such amounts, were forgiven and recorded as
additional compensation expense. In addition, the Company loaned the executive
$100,000 in January, 2000, with interest due quarterly at a rate of 8%. At
September 30, 2000, $100,000 remained outstanding.
During 1989, the Company entered into a consulting agreement with Stuart
Hersch, a director of the Company. The agreement is on a month-to-month basis.
For the years ended September 30, 1998, 1999 and 2000 the Company recognized
$90,000, $71,000 and $59,200 respectively, in consulting expense under this
agreement.
Since 1991 Irwin Friedman, a director of the Company, has rendered
financial consulting services to the Company through the firm I. Friedman
Equities, Inc. During 1997 in connection with rendering certain services, that
firm was granted warrants exercisable for 100,000 shares of common stock (Note
7). For the years ended September 30, 1998, 1999 and 2000 the Company recognized
$24,000, $48,000 and $101,000, respectively, in consulting expense under various
agreements with that firm. During the year ended September 30, 1999, I. Friedman
Equities, Inc. was also paid $62,000 pursuant to a 1996 agreement in
50
<PAGE> 52
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
connection with the redemption of Class C Common Stock Warrants, and that amount
was charged to stockholders' equity.
In December 1994, the Company loaned August Entertainment, Inc. ("August")
$650,000 against distribution rights to third party product. August is majority
owned by Gregory Cascante, former President of the Company's international film
distribution division. The loan bore interest at the lesser of (a) Prime plus 2%
or (b) 10%. In January 1999 the loan was assigned to a subsidiary, and was used
to reduce pre-existing obligations to August.
From May 1997 to October 1997, Peter Locke (co-chairman of US SEARCH.com
and the Company) personally loaned to US SEARCH.com amounts aggregating
approximately $397,000 (gross of any repayments which occurred during such
period). The loans with interest at 10% per annum were repaid in full. In
addition, US SEARCH.com paid approximately $40,000 in consulting fees and
interest to Mr. Locke for services rendered through December 31, 1997.
(11) SEGMENT INFORMATION
Prior to fiscal 1998, the Company operated in one business segment, film
and television programs. Early in fiscal 1998 the Company obtained controlling
interest in US SEARCH.com. The Company subsequently operated in two segments:
film and television program production and distribution, and search services
related to US SEARCH.com. Each segment is a strategic business unit that offers
different products and services. They are managed separately because each
requires different investment, technology and marketing strategies. Management
evaluates business segment performance based on operating revenues, operating
earnings and asset growth.
The film and television program business segment exploits distribution
rights in its film and television program libraries, films and television
programs produced by the Company or co-produced with equity affiliates, and film
and television programs produced by third parties. Products are licensed in both
the United States and virtually all international markets.
The search services business segment consists solely of the Company's
interest in US SEARCH.com, which provides people search and customized
individual reference services. Services are provided almost exclusively to
United States customers.
51
<PAGE> 53
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized financial information regarding the Company's business segments
is shown in the table below.
<TABLE>
<CAPTION>
FILM AND SEARCH
TELEVISION SERVICES CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
FISCAL 2000:
Operating revenues............................... $ 34,961,000 $ 24,679,000 $ 59,640,000
Gross profit (loss).............................. (1,337,000) 13,354,000 12,017,000
(Loss) before income taxes....................... (24,459,000) (14,795,000) (39,254,000)
Total assets..................................... 133,095,000 18,105,000 151,200,000
FISCAL 1999:
Operating revenues............................... 34,143,000 15,747,000 49,890,000
Gross profit..................................... 917,000 9,307,000 10,224,000
Earnings (loss) before income taxes.............. 16,539,000 (11,342,000) 5,197,000
Total assets..................................... 154,627,000 30,488,000 185,115,000
FISCAL 1998:
Operating revenues............................... 68,261,000 7,869,000 76,130,000
Gross profit..................................... 10,223,000 4,280,000 14,503,000
(Loss) before income taxes....................... 1,419,000 (4,736,000) 6,155,000
Total assets..................................... 134,319,000 2,786,000 137,105,000
</TABLE>
Geographic Data
The revenues of equity affiliates are generated worldwide and their
operations are principally located in the United States. The table below
presents sources of operating revenue by country or territory for the Company
and consolidated subsidiaries. Equity affiliates are not included.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
United States............................... $41,533,000 $33,862,000 $40,251,000
Germany..................................... 5,427,000 4,420,000 12,954,000
France...................................... 2,105,000 281,000 2,302,000
Great Britain............................... 745,000 1,712,000 1,596,000
Latin America............................... 2,299,000 5,625,000 3,574,000
Australia................................... 48,000 719,000 2,181,000
Japan....................................... 795,000 637,000 3,077,000
Spain....................................... 1,314,000 -- 3,289,000
Italy....................................... 1,500,000 383,000 3,463,000
Other foreign countries or territories...... 3,874,000 2,251,000 3,443,000
----------- ----------- -----------
Total revenues.................... $59,640,000 $49,890,000 $76,130,000
=========== =========== ===========
</TABLE>
52
<PAGE> 54
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents film and television program costs and total
assets based upon their geographic location:
<TABLE>
<CAPTION>
UNITED LATIN GREAT
STATES AMERICA BRITAIN TOTAL
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
September 30, 2000:
Film and television program costs... $ 80,407,000 $ 581,000 $ -- $ 80,988,000
Total assets........................ 146,177,000 3,065,000 1,958,000 151,200,000
September 30, 1999:
Film and television program costs... 89,163,000 2,508,000 -- 91,499,000
Total assets........................ 179,864,000 3,163,000 2,088,000 185,115,000
September 30, 1998:
Film and television program costs... 73,773,000 -- -- 73,773,000
Total assets........................ 132,756,000 2,361,000 1,988,000 137,105,000
</TABLE>
Customer Concentration
For the year ended September 30, 2000, sales to two United States and one
international film and television program customer represented 28% of the
Company's consolidated operating revenues. At September 30, 2000, accounts
receivable from two customers represented 40% of the Company's consolidated
accounts receivable. For the year ended September 30, 1999, sales to one United
States film and television program customer represented 18% of the Company's
consolidated operating revenues. At September 30, 1999, accounts receivable from
two customers represented 31% of the Company's consolidated accounts receivable.
For the year ended September 30, 1998, sales to two international film and
television program customers represented 26% of the Company's consolidated
operating revenues. At September 30, 1998, accounts receivable from two
customers represented 41% of the Company's consolidated accounts receivable.
53
<PAGE> 55
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) EARNINGS (LOSS) PER SHARE
The table below reconciles net earnings (loss) and average shares of common
stock outstanding to those amounts used to calculate basic and diluted earnings
(loss) per share.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic earnings per share -- earnings
(loss) available to common stockholders.......... $(39,254,000) $ 4,471,000 $(6,336,000)
Effect of dilutive securities: interest on
convertible debt................................. -- 60,000 --
------------ ----------- -----------
Numerator for diluted earnings per share --earnings
(loss) available to common stockholders after
assumed conversions.............................. $(39,254,000) $ 4,531,000 $(6,336,000)
------------ ----------- -----------
DENOMINATOR:
Denominator for basic earnings per
share -- weighted average shares................. 13,839,000 11,755,000 9,181,000
------------ ----------- -----------
Effect of dilutive securities:
Employee stock options........................... -- 378,000 --
Warrants......................................... -- 434,000 --
Convertible debentures........................... -- 129,000 --
------------ ----------- -----------
Dilutive potential common shares................. -- 941,000 --
------------ ----------- -----------
Denominator for diluted earnings per
share -- adjusted weighted average shares and
assumed conversions.............................. 13,839,000 12,696,000 9,181,000
============ =========== ===========
Basic earnings (loss) per share.................... $ (2.84) $ .38 $ (.69)
============ =========== ===========
Diluted earnings (loss) per share.................. $ (2.84) $ .36 $ (.69)
============ =========== ===========
</TABLE>
All options, warrants, and convertible debentures were antidilutive for the
year ended September 30, 2000. A total of 367,000 shares of common stock
representing the potential exercise of options, warrants and the potential
conversion of debentures were not included in the calculation of diluted
earnings per share for fiscal 1999, as the impact of including such securities
would be antidilutive. All options, warrants, and convertible debentures were
antidilutive for the year ended September 30, 1998.
(13) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 2000, the Company revised its estimates of
future revenues for certain library product. In addition during the fourth
quarter of 2000, the Company increased its provision for bad debts. The
adjustments to revise estimates of future revenues and increase the allowance
for doubtful accounts recorded in the fourth quarter of 2000 amounted to
approximately $8,425,000. Additionally, in the fourth quarter, as a result in
the decline in market value of Harvey Entertainment, Inc., the Company recorded
a $3,893,000 impairment write down of its equity investment.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
CASH PAID FOR:
Interest..................................... $6,845,000 $7,436,000 $6,427,000
Taxes........................................ $ 79,000 $ 30,000 $ 40,000
</TABLE>
54
<PAGE> 56
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal 1998:
- The Company acquired an 80% interest in 800-US Search in exchange for
certain guaranties of indebtedness. In conjunction with the acquisition,
liabilities assumed were:
<TABLE>
<S> <C>
Fair value of assets acquired............................ $ 461,000
Cash paid for the capital stock.......................... --
Liabilities assumed...................................... $2,557,000
</TABLE>
- $300,000 of convertible subordinated debentures were converted into
51,282 adjusted shares of common.
Fiscal 1999:
- The Company assigned a note receivable from August of $192,000 to a
subsidiary to reduce pre-existing subsidiary obligations to August (Note
9).
- $100,000 of a note receivable from an officer of the Company was forgiven
(Note 9).
- $296,000 in related party notes of US Search.com were forgiven (Note 9).
- The Company issued common stock with a value of $5,820,000 in exchange
for convertible preferred stock and detachable warrants in Harvey (Note
1).
- $9,713,000 of convertible subordinated debentures were converted into
1,288,185 adjusted shares of common stock.
- A formerly-consolidated film production subsidiary was deconsolidated as
the Company no longer exercised control. The non-cash reduction in assets
and liabilities were:
<TABLE>
<S> <C>
Accounts receivable...................................... $ 16,000
Film and television program costs........................ $1,810,000
Other assets............................................. $ 40,000
Accounts payable and accrueds............................ $ 38,000
Notes payable............................................ $1,950,000
</TABLE>
Fiscal 2000:
- $146,000 of convertible subordinated debentures were converted into
25,641 adjusted shares of common stock.
- $150,000 of a note receivable from an officer of the Company was recorded
as compensation expense.
- The Company purchased partnership units in World Wide Multimedia, LLP by
contributing film titles valued at $2,500,000 and paying $2,000,000 in
cash proceeds from a loan from Far East National Bank.
55
<PAGE> 57
SCHEDULE II
THE KUSHNER-LOCKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED DEDUCTIONS
BEGINNING OF TO COSTS AND DUE TO BALANCE AT
PERIOD EXPENSES WRITE-OFFS END OF PERIOD
------------ ----------------- ---------- -------------
<S> <C> <C> <C> <C>
Allowances for Doubtful Accounts:
Year Ended 9/30/00................. $3,248,000 6,068,000 4,870,000 $4,446,000
========== ========= ========== ==========
Year Ended 9/30/99................. $2,509,000 2,959,000 (2,220,000) $3,248,000
========== ========= ========== ==========
Year Ended 9/30/98................. $ 925,000 2,118,000 (534,000) $2,509,000
========== ========= ========== ==========
</TABLE>
56
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: December 18, 2000 /s/ DONALD KUSHNER
--------------------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer and
Secretary
Dated: December 18, 2000 /s/ BRETT ROBINSON
--------------------------------------
Brett Robinson
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and the capacities and on the dated indicated.
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: December 18, 2000 /s/ PETER LOCKE
--------------------------------------
Peter Locke
Co-Chairman of the Board and
Co-Chief Executive Officer
Dated: December 18, 2000 /s/ DONALD KUSHNER
--------------------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer and
Secretary
Dated: December 18, 2000 /s/ BRETT ROBINSON
--------------------------------------
Brett Robinson
Senior Vice President and Chief
Financial Officer
Dated: December 18, 2000 /s/ IRWIN FRIEDMAN
--------------------------------------
Irwin Friedman
Director
Dated: December 18, 2000 /s/ STUART HERSCH
--------------------------------------
Stuart Hersch
Director
Dated: December 18, 2000 /s/ JOHN LANNAN
--------------------------------------
John Lannan
Director
57
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<C> <S>
3 Articles of Incorporation(A)
4.1 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1, 1990
pertaining to 10% Convertible Subordinated Debentures Due
2000, Series A(E)
4.2 First Supplemental Indenture between the Company and
National City Bank of Minneapolis, as Trustee, dated as of
March 15, 1991 pertaining to 10% Convertible Subordinated
Debentures Due 2000, Series A(F)
4.3 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1, 1990
pertaining to 13 3/4% Convertible Subordinated Debentures
Due 2000, Series B(E)
4.4 Warrant agreement between the Company and City National
Bank, as Warrant Agent, dated as of March 19, 1991
pertaining to Common Stock Purchase Warrants(F)
4.5 Warrant agreement dated September 5, 1997 between the
Company and Allen & Company Incorporated.(U)
4.6 Warrant agreement dated September 5, 1997 between the
Company and I. Friedman Equities, Inc.(U)
4.7 Warrant Agreement dated June 27, 1997 between the Company
and I. Friedman Equities, Inc.(U)
10.1 Amended and Restated Employment Agreement dated October 1,
1997 between the Company and Donald Kushner.(W)
10.1.1 First Amendment to Amended and Restated Employment Agreement
dated March 2, 1999 between the Company and Donald
Kushner.(Y)
10.2 Amended and Restated Employment Agreement dated October 1,
1997 between the Company and Peter Locke.(W)
10.2.1 First Amendment to Amended and Restated Employment Agreement
dated March 2, 1999 between the Company and Peter Locke.(Y)
10.3 1988 Stock Incentive Plan of the Company(A)
10.4 Form of Indemnification Agreement(A)
10.5 Kushner-Locke Shareholders' Cross-Purchase Agreement dated
as of October 1, 1988 between and among Donald Kushner,
Rebecca Hight, Peter Locke, Karen Locke, Peter Locke
Productions, Inc. and Twelfth Street Limited(A)
10.5.1 Amendment dated as of May 14, 1992 to the Kushner-Locke
Shareholders' Cross-Purchase Agreement dated as of October
1, 1988 between and among Donald Kushner, Rebecca Hight,
Peter Locke, Karen Locke, Peter Locke Productions, Inc. and
Twelfth Street Limited(I)
10.6 Kushner-Locke Trust Agreement dated as of October 1, 1988
between and among Donald Kushner, Rebecca Hight, Peter
Locke, Karen Locke, Peter Locke Productions, Inc. and
Twelfth Street Limited(A)
10.6.1 Amendment dated May 14, 1992 to the Kushner-Locke Trust
Agreement dated as of October 1, 1988 between and among
Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke,
Peter Locke Productions, Inc. and Twelfth Street Limited(I)
10.12 Lease Agreement, dated as of November 1989, between the
Company and 11601 Wilshire Associates(G)
10.12.1 Amended Lease Agreement(G)
10.12.2 Lease Agreement by and between Arden Realty Limited
Partnership and The Kushner-Locke Company as of August 13,
1999.(G)
</TABLE>
58
<PAGE> 60
<TABLE>
<C> <S>
10.16 Warrant Agreement between the Company and Chatfield Dean &
Co., Inc. dated as of November 13, 1992(J)
10.19 Fiscal Agency Agreement dated March 10, 1994 between and
among the Company, Bank America National Trust Company and
Bank of America National Trust and Savings Association(K)
10.19.1 Side letter between the Company and BankAmerica Trust
Company to the Fiscal Agency Agreement dated March 10, 1994
between and among the Company, BankAmerica Trust Company and
Bank of America National Trust and Savings Association(K)
10.20 Warrant Agreement dated March 10, 1994 between the Company
and RAS Securities Corp.(K)
10.21 Warrant Agreement dated March 10, 1994 between the Company
and I. Friedman Equities, Inc.(K)
10.22 Fiscal Agency Agreement dated July 25, 1994 between and
among the Company, Bank America National Trust Company and
Bank of America National Trust and Savings Association(L)
10.27 Loan and Security Agreement dated December 1, 1994 between
the Company and August Entertainment, Inc., and Guarantees
between the Company, August Entertainment, Inc. and the
Allied Entertainments Group PLC and certain of its
subsidiaries(M)
10.44 Amendment to the 1988 Stock Incentive Plan dated May 17,
1994(Q)
10.56 Letter Agreement, dated as of April 12, 1996, by and among
The Kushner-Locke Company, Chemical Bank and Chase
Securities Inc.(T)
10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of
June 19, 1996, among The Kushner-Locke Company, the
Guarantors named therein, the lenders named therein and The
Chase Manhattan Bank, N.A., (formerly Chemical Bank) as
Agent, and as Fronting Bank for the lenders (the "Credit
Agreement")(T)
10.58 Employment Agreement dated September 14, 1996 between The
Kushner-Locke Company and Bruce St. J Lilliston(V)
10.59 Loan and Security Agreement dated March 1, 1996 between The
Kushner-Locke Company and its subsidiaries and Banque
Paribas, Los Angeles Agency(V)
10.61 Waiver of Section 6.17 Overhead Expenses of the Credit
Agreement, dated as of .(V)
10.62 Amendment No. 5 dated as of December 22, 1997 to the Credit
Agreement.(W)
10.63 Amendment No. 6 dated as of May 13, 1998 to the Credit
Agreement.(X)
10.64 Amendment No. 7 dated as of December, 1998 to the Credit
Agreement.(Y)
10.65 Waiver of Section 6.17 Overhead Expenses of the Credit
Agreement, dated as of December 9, 1999.(Y)
10.66 Amendment No. 8 dated as of May 14, 1999 to the Credit
Agreement.(Z)
10.67 Amendment No. 9 dated as of April 18, 2000 to the Credit
Agreement.(Z)
10.68 Amendment No. 10 dated as of August 23, 2000 to the Credit
Agreement.(Z)
23.1 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
</TABLE>
---------------
(A) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-18, as amended, effective December 5, 1988 (Commission
File No. 33-25101-LA).
(B) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1989.
(C) Incorporated by reference from the Exhibit to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1990.
(D) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-37192), as initially filed on October 5,
1990 or as amended on November 30, 1990.
59
<PAGE> 61
(E) Incorporated by reference from the Exhibits to the Company's Registration
Statements on Form S-1, as amended, effective November 30, 1990 (File No.
33-37192), and effective December 20, 1990 (File No. 33-37193).
(F) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, effective March 20, 1991.
(G) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1991.
(H) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1991.
(I) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1992.
(J) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-2, as amended, effective November 12, 1992 (Commission
File No. 33-51544).
(K) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal quarter ended March 31, 1994.
(L) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1994.
(M) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1994.
(N) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1995.
(O) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
(P) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1995.
(Q) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended December 31, 1995.
(R) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
(S) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1996.
(T) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-2, as amended, effective August 15, 1996 (Commission
File No. 333-05089).
(U) Incorporated by reference from the Exhibits to the Company's Registration
Statement on form S-3 as filed November 17, 1997 (Commission File No.
333-40391).
(V) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1996.
(W) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1997.
(X) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(Y) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1999.
(Z) Filed herewith.
60
